On October 19, 2022, the IRS issued a press release (IR-2022-183) warning taxpayers to be wary of third parties who advise them to claim an employee retention credit (ERC) when they do not qualify.

According to the IRS, these third parties “often charge large upfront fees or a fee that is contingent on the amount of the refund.” The IRS is also concerned that these third parties “may not inform taxpayers that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit.”

The IRS encouraged taxpayers to be “cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true.” Taxpayers are responsible for the accuracy of ERC claims and improperly claiming the ERC “could result in taxpayers being required to repay the credit along with penalties and interest.”

As we have written before, one unfortunate side effect of the ERC explosion has been the proliferation of tax credit companies offering dubious advice in exchange for outsize fees.If a business is concerned about an ERC claim it already filed, it is not too late to review the claim and possibly reverse or adjust it, even if the refund has already been received.

The IRS has already started to aggressively audit ERC claims, some even before they are paid. We have seen the IRS scrutinize taxpayers’ calculations of gross receipts and the reasons behind a claimed suspension of business operations. In the latter case, the IRS typically requests the specific governmental orders that led to the suspension and makes sure that the wages included in the ERC calculation match up with the effective dates of such orders. Remember that just because a business had to purchase PPE, or require masking or social distancing, it did not necessarily have a partial suspension of business operations. Also, vague and generalized claims of supply chain issues are not enough; they need to be tied to a governmental order that caused the supplier to suspend its business operations.

Last, we have seen multiple lawsuits filed against tax credit shops for advising businesses they were entitled to an ERC when they were not. The lawsuits generally seek a return of fees and/or reimbursement of interest and penalties that the businesses have or will be required to pay to the IRS. We have already been approached by businesses to act as an expert witness in support of these types of claims.

Please remember the adage that “if something sounds too good to be true, it probably is.” This applies with equal force to the ERC.

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 litigation involving the ERC.

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For more information on this topic, please contact a member of Withum’s COVID-19 Financial Assistance Services Team.