IRS Doubles Down on ERC Warning to Taxpayers

The IRS issued a press release with a renewed warning to taxpayers regarding claims for the Employee Retention Credit (ERC) on March 7, 2023. This marks the third time in six months the IRS has issued a written warning to taxpayers – the first two were issued in October and November of 2022, and we wrote about the October notice here.

If your business plans to claim or already has claimed the ERC, it is imperative that you substantiate your claim because the IRS is signaling significant enforcement action regarding the ERC. We noticed the uptick in audit activity and are seeing a significant increase in IRS audits of ERC claims.

The substance of the most recent press release echoes IRS’s previous rhetoric, notably that it continues to see “third parties aggressively promoting [ERC] schemes on the radio and online.” Taxpayers should be cautious when they see requests for large upfront fees or fees contingent upon the amount of the refund. The IRS also noted that promotors may not be upfront with taxpayers about the requirement to amend their federal income tax returns to reduce wage deductions by the amount of the credit.

The press release included strong language from IRS Acting Commissioner Doug O’Donnell:

While this is a legitimate credit that has provided a financial lifeline to millions of businesses, there continue to be promoters who aggressively mislead people and businesses into thinking they can claim these credits… Anyone who is considering claiming this credit needs to carefully review the guidelines. If the tax professional they’re using raises questions about the accuracy of the Employee Retention Credit claim, people should listen to their advice. The IRS is actively auditing and conducting criminal investigations related to these false claims. People need to think twice before claiming this.

The IRS stated that businesses can avoid these schemes by not falling victim to them in the first place – though we understand that may not be possible for the billions of dollars in ERC claims these promoters have filed previously. We recommend taxpayers be alert for guaranteed claims of substantial tax savings and be sure you are working with tax professionals with a proven track record. Remember, taxpayers are ultimately responsible for what they report on their tax returns – which includes penalties and interest from improperly filed ERC claims.

Also on March 7, 2023, the IRS’s Office of Professional Responsibility (OPR) issued a warning to tax professionals regarding the ERC. The notice reminds tax professionals that they must be diligent as to the accuracy of ERC claims and should not prepare an original or amended tax return that claims or perpetuates a potentially improper ERC claim. The perpetuation of an improper ERC claim can result from the filing of the claim itself or by preparing an original or amended income tax return to reduce wage or health plan expense deductions by the amount of the ERC. Additionally, if a tax practitioner learns that a current client did not comply with the ERC requirements in a prior tax year, the practitioner is expected to promptly inform the client of the noncompliance, error, or omission and any penalties that may apply. Withum has a dedicated team of ERC experts who can assist with preparing or reviewing your ERC claim, representing you before the IRS if your ERC claim is audited, and acting as an expert witness in civil or criminal investigations involving the ERC. If you have any questions, don’t hesitate to contact us, but in the meantime, you can check out our many published articles on ERC.

Authors:Matthew Walsh, Market Leader, COVID-19 Financial Assistance Services |[email protected] and Luke Kim, CPA, CFE | [email protected]