Unfortunately, a growing number of employee retention credit scams are at-large, with scammers employing evermore creative means of bilking businesses out of excessive fees or even engaging in outright fraud.
This is leading to employers begging the question of, "is ERC a scam?"
While it's most definitely not a scam, you should be aware of the scams in operation as we discuss below, and work with a well-respected tax attorney, such as Brotman Law.
Is ERC legit?
Yes, the ERC is a legitimate refundable tax credit. While many employers that were shut down or otherwise financially affected by the pandemic in 2020, 2021 or both are eligible to receive this credit, the IRS warns employers about third-party ERC scams that can lead to tax compliance risk.
Is the IRS warning about ERC?
The IRS continues to warn employers about third-party bad actors who encourage ineligible businesses to claim the credit anyway—along with other scams. Claiming the ERC improperly can lead to repayment requirements that include penalties and interest. These third parties often charge exorbitant fees for services the businesses don’t require.
Don’t believe scammers who say you can claim for the credit outside of your federal tax return—that’s simply not true.
The only help you need is from a trusted tax attorney.
3 Employee retention credit scams that require attention
While ERC scams can take many forms, most fall into one of several basic categories, including:
- Phone call scam
- Collection scam
- Identity theft scam
Ultimately, any direct solicitation regarding the ERC should be considered suspect.
1. Employee retention credit phone call scam
The employee retention credit phone call scam involves third parties soliciting employers over the phone with false claims of ERC eligibility that involve overlooking the federal government’s requirements.
It’s important that obtaining an ERC under false circumstances can lead to trouble with the IRS that you really don’t want.
Even if you do qualify for the credit, count on the phone scammers to charge an exorbitant and frankly unnecessary hefty percentage of your refund for a service that you don’t need.
2. ERC collection scam
Another primary scam aimed at you, the taxpayer, involves fraudsters who make ERC claims on behalf of businesses and keep a significant portion of the credit in the process.
If you’re eligible for an ERC for any of the available financial quarters, which include the last three in 2020 and the first three in 2021, you’ll need to file corresponding 941-X forms, which do not require the services of a third party.
3. ERC scam involving identity theft
A more elaborate form of ERC fraud relates to identity theft, which can lead to even more serious consequences.
These scams involve third parties who solicit sensitive information from businesses that are not eligible employers for the ERC and proceed to apply for the credit using the stolen financial identity.
Why am I getting calls about ERC?
The IRS reports that aggressive ERC marketing is on the rise, and this explains why businesses are receiving numerous calls. Even when these calls aren’t outright scams, they’re generally designed to help companies obtain tax credits for which no third-party—other than a trusted tax advisor or attorney—is necessary.
8 Ways to avoid ERC scams
Protecting yourself from ERC scams begins with taking common-sense precautions, working with well-established professionals, and turning a deaf ear to solicitors with news about the ERC that is simply too good to be true.
All the following can help:
1. Work with trusted tax professionals
If you own or manage a business, you recognize how exacting and complex tax compliance is, and this makes working with a seasoned tax professional whenever you face a tax concern paramount.
Relying on unsolicited tax advice from someone who contacts you by phone or email isn’t a great practice.
Get in touch with me so we can discuss your ERC situation and avoid the scams.
2. Confirm ERC eligibility and the firm’s credentials
The person or entity you’re considering working with regarding the ERC should openly discuss all the following with you:
Your business’s eligibility for the credit
Their professional tax credentials
The percentage or ERC cases they’ve resolved favorably to date
If the representative you communicate with isn’t forthcoming on each of these topics, they’re unlikely to be a good fit.
3. Understand the ERC requirements before agreeing to anything
Because YOU are ultimately responsible for every tax filing your business makes, it’s important to know the ERC requirements and ensure your own eligibility prior to signing off on anything.
To qualify for the credit, you must continue to have FICA wages paid and file quarterly 941s during the applicable financial quarters while one of the following also applied:
When you’re confident about your own eligibility, it helps protect you from ERC scams.
4. Insist on personal communication
ERC scams generally send out marketing blasts in an attempt to hook as many takers as they can get.
Working with a tax advisor whom you can’t meet in person or can’t schedule phone conferences with is a bad bet.
5. Delve into how the company’s services are paid
Legitimate tax attorneys charge their clients according to their set tax preparation payment schedules and not on a contingency basis, which means that pay is contingent on the credit or refund received.
If the firm you’re considering charges a percentage of any credit that comes to you, it’s not the firm for you.
6. Inquire regarding defense against IRS audits
Working with a practiced tax professional is an excellent means of ensuring that your tax filings are correct, timely, and compliant.
Reputable tax firms assure guidance and defense in the face of IRS audits, and if the representative you’re talking to doesn’t offer similar assurances, it’s a red flag.
Additional reading: Will the IRS audit the ERC credit?
7. Establish a realistic time frame for receipt of credit
The IRS is bombarded with ERC filings—both legitimate and illegitimate—and scam filings have slowed the process considerably.
While the turnaround time was about 2 months at the credit’s inception, it currently takes significantly longer.
So, if a firm promises you early receipt, it’s unrealistic, at best.
8. Does the company finance the credit prior to its receipt?
Well-established tax preparation entities have the means to finance those refunds and credits that clients are unmistakably entitled to, and if the firm you’re considering doesn’t have the resources to do so, further investigation is warranted.
Avoid employee retention credit scams with these questions
Ask these questions of someone claiming they’re a tax attorney or that they can help you with your claim to weed out ERC scammers:
1. How long have you been in the business tax industry?
You’re looking for a company with considerable experience in the tax arena, NOT for a company that popped up to capitalize solely on the ERC.
The longer a tax attorney has been in the tax business, the better.
2. Is the ERC the only tax credit you address?
Tax professionals whose work focuses entirely on the ERC are very unlikely to have the breadth of knowledge and experience you need.
3. Do you provide supporting documentation in the face of an audit?
Qualified tax professionals back up their services with supporting documentation and audit defense. If neither is offered, it’s time to keep looking.
This is something the team here at Brotman Law can absolutely provide for you.
4. What percentage of your clients qualify for the ERC?
The fact is that only those businesses that meet careful Internal Revenue Service requirements qualify for the ERC, and if the firm you’re considering quotes a high percentage, it’s a clear sign that something’s up.
How Brotman Law can help you avoid the ERC scams
At Brotman Law, we appreciate how overwhelming the ERC can be for business owners. You don’t want to miss out on the credit to which you’re entitled, but you’re also concerned about overstepping your legal boundaries.
Our formidable California tax attorneys have a wealth of experience effectively and efficiently handling tax matters of every kind, including the ERC.
We have the experience, resources, and solid reputation you’re looking for, and we welcome your enquiries.
Employee retention credit scams come in many forms
Even though the ERC is a legitimate refundable tax credit, you should recognize that there are a wide range of ERC scams out there.
Many are driven by third parties that are intent on taking a cut of your credit, but others go after credits that your business may not be eligible for in the first place. Unfortunately, some even steal financial identities and use the information to pursue fraudulent ERCs.
Working closely with a focused California tax attorney can help maximize your ERC while minimizing your risk of being scammed.