What Constitutes Employee Retention Credit (ERC) Fraud?

July 25, 2023
Dayes Law Firm

The Employee Retention Credit (ERC) can be an invaluable safety net for eligible employers. It’s intended to provide payroll tax relief for qualified wages your business paid in 2020 and 2021. These pandemic-era credits can total thousands of dollars for each employee. 2021 for instance, the IRS could give you a credit of up to $7,000 per employee per quarter.

When the IRS launched the ERC program, scammers immediately saw dollar signs. Despite the strict requirements for eligibility, ERC fraud is a huge problem for businesses and the government.

ERC Fraud and Scams To Watch Out For

What exactly is ERC fraud? Businesses can commit ERC fraud by applying for the refundable tax credit when they don’t qualify.

But even ethical businesses can fall victim to ERC fraud scams. The following are a few types of ERC fraud to watch out for.

ERC Mills

ERC mills are shady companies with one goal: to file as many ERC claims as possible. Unlike legitimate companies, these mills misrepresent or flat-out lie about ERC requirements. They use aggressive marketing to convince business owners they qualify for the credit even if they don’t.

Why bother? Because ERC mills charge hefty fees from your refund. These fees are often far higher than what you’d pay for the help of a legit tax professional.

To make matters worse, the IRS will also force you to repay the credit if it finds out your business doesn’t qualify. It’ll hit you with penalties and interest, too.

If anyone guarantees you qualify for the credit without checking out your tax situation first, steer clear of them.

Identity Theft

ERC fraud can affect you even if you don’t file a claim. Scammers may pose as tax advisors to collect information about your business. They’ll then use this information to make a claim in your business’s name. That money will go to the scammers, not to you.

Lying on Your Claim

With thousands of dollars on the line, it’s tempting to fudge the numbers when applying for the ERC. But even if you pull it off, your victory will be short-lived when the IRS makes you pay back every dollar you collected fraudulently.

The following are some common ways business owners commit ERC fraud:

  • Saying they suffered from a full or partial suspension of operations when they didn’t. If you claim a government order shuts your business down, you’ll need to back it up with proof.
  • Claiming credits for disqualified employees. Depending on how many employees you have, you may not be able to claim credits for employees who provided services for you in 2020 or 2021. If you had more than 100 employees in 2020, for instance, you could only claim credits for those who weren’t actively working for you at that time.  
  • Inventing fake employees as a way to boost your roster for the ERC. This one’s pretty simple to avoid: Don’t claim the credit for workers who don’t exist.
  • Lying about how much you paid your employees. The IRS bases the credit on how much you pay in qualified wages and health plan expenses for workers. Be sure to give accurate numbers on your Form 941-X.

Contact Dayes Law Firm PC To Learn More About ERC Fraud

The ERC credit can be worth a lot of money if you qualify, but claiming it involves plenty of potential pitfalls. Instead of dealing with an ERC mill that could cost you thousands in fees, reach out to Dayes Law Firm PC at (866) 257-1223 today. Our experienced consultants will help you claim your ERC the right way.