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Be Cautious When Seeking Employee Retention Credit

Posted on May 16, 2023

There has been a lot of advertising and solicitation from third parties recently advising businesses to use the employee retention credit (ERC) that was first made available through the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) when it was passed in March of 2020 at the onset of the pandemic.

The Internal Revenue Service (IRS) has issued numerous warnings to employers to be cautious of these ads and solicitations.  Filing for a tax credit for which you do not qualify can lead to significant penalties.

Each year, the IRS compiles a “Dirty Dozen” list of common scams that typically peak during tax filing season.  The ERC is at the top of the 2023 Dirty Dozen list.

The ERC was designed for businesses that continued to pay employees while shut down due to the pandemic, or who had significant declines in gross receipts at some point between March 2020 and December 2021.  To be eligible for the ERC, employers must have:

  • Experienced a full or partial shutdown of operations due to a governmental order during 2020 or the first three quarters of 2021,
  • Experienced a significant decline in gross receipts during 2020 or the first three quarters of 2021, or
  • Qualified as a recovery startup business for the third or fourth quarters of 2021.

Employers may not claim the ERC on wages that were reported as payroll costs for PPP (Paycheck Protection Program) loan forgiveness or that were used to claim other tax credits.  PPP loan forgiveness was available to employers who met certain conditions for the use of money borrowed under the program.

The IRS has indicated that it is stepping up enforcement action involving ERC claims.  Its auditors are trained to scrutinize these claims, and the IRS Criminal Investigation Division is on the lookout for promoters of fraudulent claims for ERCs.

The adage “if it sounds too good to be true it probably is” applies here.  Be sure to question your tax professional before claiming the ERC. Employers may report suspected fraud to the IRS at and to the Treasury Inspector General for Tax Administration at 800-366-4484.

Members with questions about this or any other human resources matter may reach out to the AIM Employer Hotline at 800-470-6277.