It’s not too late to get tax relief in the form of the Employee Retention Credit that was created as part of the CARES Act in 2020, then retroactively improved and extended by additional legislation. The credit can still be claimed via an original or amended employment tax return for the period of March 13, 2020 to Dec. 31, 2021.
But scammers are taking advantage of the confusion regarding eligibility to claim the Employee Retention Credit, and the fact that your peers are nervous about the economy and taking extra steps to hold on to cash and keep tax payments low.
Many companies have been receiving advertisements and/or direct solicitations from third parties offering attractive tax savings related to the Employee Retention Credit, and the IRS has taken notice.
According to the Service, if these offers seem too good to be true, they probably are, and you should consult a tax advisor about any promotional offers you receive related to the Employee Retention Credit.
Spotting illegal Employee Retention Credit schemes
Typically, predatory third parties will lie to an employer about being eligible for the Employee Retention Credit when it may not qualify. The bait also includes computing an alleged tax credit and even offering to file an amended tax return on the employer’s behalf.
The tell-tale sign it’s a rip-off – a large upfront fee or a fee that’s contingent on the amount of the alleged refund.
These shady entities may also conveniently neglect to disclose that wage deductions claimed on your business’ federal income tax return must be reduced by the amount of the credit. According to the IRS, if you file an income tax return deducting qualified wages before filing an employment tax return claiming the credit, you should file an amended income tax return to correct any overstated wage deduction.
Employers can wind up in hot water if they’re not careful. The IRS issued a reminder that taxpayers are responsible for the information reported in their tax returns, and improperly claiming the Employee Retention Credit could result in not only being required to repay the credit, but also being slapped with painful penalties and interest.
If you think your business has been targeted, report it to the IRS by submitting the Form 3949-A Information Referral or calling the Treasury Inspector General for Tax Administration at 800-366-4484.
Can you still claim the credit?
To be eligible for the Employee Retention Credit, you must have:
- sustained a full or partial suspension of operations due to government orders limiting commerce, travel or group meetings due to COVID-19 during 2020 or the first three quarters of 2021
- experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
- qualified as a recovery startup business for the third or fourth quarters of 2021 (only recovery startup businesses are eligible for the credit in the fourth quarter of 2021).
In addition, for any quarter of 2020-2021 eligible employers can’t claim the Employee Retention Credit on wages that were reported as payroll costs in obtaining PPP loan forgiveness, or that were used to claim certain other tax credits.
IRS.gov has even more detailed information about eligibility requirements and how to claim the Employee Retention Credit the right way:
- For qualified wages paid after March 12, 2020 and before Jan. 1, 2021, see Notice 2021-20, Notice 2021-49 and Revenue Procedure 2021-33.
- For qualified wages paid after Dec. 31, 2020 and before July 1, 2021, see Notice 2021-23, Notice 2021-49 and Revenue Procedure 2021-33.
- For qualified wages paid after June 30, 2021 and before Oct. 1, 2021, see Notice 2021-49 and Revenue Procedure 2021-33.
- For qualified wages paid after Sept. 30, 2021 and before Jan. 1, 2022, see Notice 2021-49 and Notice 2021-65.
Keeps COVID-19 in the ‘Dirty Dozen’
The Employee Retention Credit was intended to reward businesses that continued to pay employees while they were shut down due to the pandemic. This latest wave of fraud’s keeping COVID-related criminal activity firmly among the IRS’s “Dirty Dozen” warning list of common scams that could impact Finance.
So that your team stays sharp and avoids losses, try quizzing them on their knowledge of these five main Dirty Dozen categories:
- Pandemic-related scams using phishing emails, social media posts, phone calls or text messages
- Spear phishing attacks where criminals try to steal client data to file fraudulent tax returns for refunds
- Suspicious activity across email, social media, phone or text messages designed to trick, surprise or scare someone into providing sensitive financial information, money or other info that can be used to file false tax returns and tap into financial accounts.
- Offer in Compromise “mills” that claim they can settle tax debt for pennies on the dollar. What ends up happening is the taxpayers pay the mill a fee to get the same deal they could’ve gotten on their own by working directly with the IRS, and
- Abusive transactions that involve either charitable remainder annuity trusts, Maltese individual retirement arrangements, foreign captive insurance or monetized installment sales.
