You wondered at the time whether it was a scam, right? And now you regularly see news reports about ERC scams. Employee retention credit scams, that is.
And so two questions. Did you get scammed? And if so, what should you do at this point? Fortunately, you can probably answer these two questions pretty easily.
Note: This blog post has been updated for the additional guidance the IRS provided on October 19, 2023.
Did You Get Conned or Scammed?
You or your business qualifies for an employee retention credit in one of three ways:
First way: You’re a small business and you started another, new business sometime after February 15, 2020 and before the end of 2021. (That’s easy, right? You know if you did this.)
Second way: Quarterly revenues, as compared to 2019, collapsed. To qualify for 2020, the collapse needs to exceed 50 percent. To qualify for 2021, the collapse needs to exceed 20 percent. (Your accounting system lets you make these determinations with roughly three or four clicks of a mouse.)
And then the third way you qualify: If a government order triggered either a full or partial suspension in your business. And this method? Where the nonsense seems to occur. The place where ERC scams show up.
Fortunately, you can easily determine your eligibility for an ERC based on a government order. You just need to pull out the actual government order that either fully closed your business for some period of time. Or you need to pull out the actual government order that partially closed your business for a period of time—and then show that the partial closure reduced the hours of service or revenues by at least 10 percent.
And now here’s the cold reality. Too often? We see situations where no government order actually exists. I kid you not. And when that’s case? Yeah, sorry. No easy way to say this. But I think you’ve very possibly gotten caught in an ERC scam.
Note: Here’s an example of an actual government order from Washington state: Proclamation by the governor: Stay Health Stay Home.
Real-life Example of ERC Scams
You see all sorts of sloppy thinking regarding government orders.
For example, in one case, a business owner prominent in his industry circulated an email that talked about a government order hitting a major supplier of his firm and similar firms. We understand numerous employers filed millions of dollars of ERC refund claims based on this email.
But when we checked? No government order existed. In fact the supplier, helpfully, said so on their website. Explicitly.
Note: A clarification: A government order “counts” for purposes of employee retention credits if it affects your business… or vendors you get supplies from… or vendors of vendors you get supplies from. A government order that affects your customers does not matter for purposes of your ERC eligibility however. (It might negatively impact your revenues of course–which is another way to qualify.)
Double-check You Got Caught in ERC Scam
So your first step is obvious, right? Find or see if the ERC consultant worked from a real government order. Get a copy. Read the copy and make sure it either closed your operation down. Or it closed down the operation of a vendor in your supply chain and the impact was more than nominal.
And if you can find this document? Count yourself lucky. Because many of your small-business-owning brothers and sisters appear to have claimed employee retention credits when no government order existed. You however should be fine. Not so for people who don’t have a government order.
Take These Steps If You Actually Were Scammed
If you did claim ERC refunds you were not entitled to? You need to take several steps to dial down the damage.
First, if the federal quarterly payroll tax returns—which is where an employer claims employee retention credits—have not yet been filed? I think you stop that process. This may mean instructing the “consultant” preparing the amended returns to stop. You probably want to tell them explicitly that you now believe no government order exists if that is case.
Second, if the federal quarterly payroll tax returns have been filed? But you haven’t received a refund? I think you withdraw your refund request using the procedure desrcibed here: Withdraw an Employee Retention Credit Claim. Note that the process works very simply in most cases: You make a copy of the 941-X form used to file the ERC refund claim, write “Withdrawn” into the left margin and then have an authorized person sign, give a title, and date the withdrawal using the right margin. You then, quoting from the IRS instructions, “Fax the signed copy of your return using your computer or mobile device to the IRS’s ERC claim withdrawal fax line at 855-738-7609.”
Third, if the IRS has already processed ERC refunds and you now know your firm was not eligible? You want to amend any tax returns that reflect the erroneous ERC refunds. For example, you want to amend the 941 quarterly payroll tax returns again and then repay the tax refund. That will get you square with the Internal Revenue Service and stop the compounding of penalties and interest.
Another example: If you amended your 2020 and 2021 income tax returns to report the refunds as income (which is required), you want to amend your income tax returns and remove that income. This will reduce your income tax liability for 2020 and 2021 and get you a refund while you still can.
Other Resources
We’ve got a bunch of blog posts about how employee retention credits work here. If you’re concerned you didn’t know enough or still don’t know enough about employee retention credits, check these out to provide yourself with the information you’ll need to get out of this mess.
If you’re a tax practitioner who now needs to do a deep dive into the law, pick up a copy of Maximizing Employee Retention Credits from Amazon.com. (You will have a number of clients who need help with this if your firm is anything like ours. Sorry.)
If you’re an employer who got into trouble on this area? Check first with your CPA to see if he or she can help you get out of the mess. If that doesn’t work, we do have an ability to help a limited number of taxpayers. You can make contact with our firm here: Nelson CPA PLLC.