How Can I Avoid Tax Evasion When Claiming the ERTC?

December 13, 2023
Dayes Law Firm

The Employee Retention Tax Credit, also called the Employee Retention Credit (ERC), gives eligible employers back a portion of wages paid to their employees. When the Internal Revenue Service introduced the ERTC in 2020, many businesses saw dollar signs and filed a claim whether they qualified for the credit or not. Quite a few, either accidentally or purposefully, committed tax evasion.

If you’d like to claim the ERTC, it’s smart to tread carefully so you don’t run afoul of the law. Here’s how to avoid tax evasion when claiming the ERTC.

Avoid ERTC Scam Companies

Claiming the ERTC is rather straightforward, and it’s fairly easy for employers to take certain liberties with the qualification requirements. ERTC processing companies, also called ERTC mills, are well aware of this and have taken advantage.

These companies aggressively advertise huge refunds despite knowing nothing about an employer’s eligibility status. They may be able to score you a large credit, but if the IRS finds any discrepancies between your claim and tax return, you might have to pay all of that money back.

It’s wise to avoid such mills, which have a reputation for harming well-meaning businesses and delaying the payment of legitimate claims. Look out for companies that:

  • Say they can claim the credit for you even if your business doesn’t file payroll tax returns
  • Promise a big refund without looking at your financial situation
  • Tell you that you’re eligible for a refund that’s higher than your total payroll tax
  • Charge a large percentage of your refund (this creates an incentive for the company to commit fraud)

Determine Whether Your Business is Eligible

You must meet specific requirements to claim the ERTC. If you don’t meet the requirements and file a claim anyway, the IRS will likely deny that claim. And if it does give you a refund, you’ll have to pay it back if the IRS later determines you’re ineligible.

These requirements are as follows:

  • Your business must have had a significant decline in gross receipts (at least 20% for 2021 and at least 50% for 2020).
  • You must have had a full or partial suspension of business operations because of a government order limiting group meetings, travel, or commerce.

Also, only recovery startup businesses can claim the ERTC for the third and fourth quarters of 2021. To qualify as a recovery startup business, you must:

  • Have opened your business on or after February 15, 2020
  • Have at least one employee
  • Have revenue of less than $1 million for the previous three years

Correctly Calculate Qualified Wages

Many businesses inadvertently commit ERTC fraud by improperly calculating qualified wages. Per IRS rules, you can only claim wages for eligible employees. This includes wages and other compensation for which you paid FICA tax, as well as healthcare costs paid for your workers.

You can only claim up to the first $10,000 of wages paid to each employee in 2020. For 2021, you can claim up to $10,000 per quarter from January to September 2021.

You may claim the ERTC on your amended employment tax return even if you accepted a Paycheck Protection Program (PPP) loan. However, if you paid any wages using a PPP loan, you cannot claim those wages for the ERTC.

We’ll Help You Claim the ERTC the Right Way

Tax evasion can have serious consequences even if you didn’t mean to commit fraud. If you’d like to claim the ERTC but are wary of making a costly mistake, reach out to Dayes Law Firm at (800) 503-2000. We’ll help you avoid tax evasion by determining whether you qualify for the credit.