Business Finance

How to Avoid Employee Retention Credit Scams

Jun 06, 2023 • 7 min read
Table of Contents

      The Employee Retention Credit is a legitimate way to offset the costs of keeping employees on the payroll during the COVID-19 pandemic. Unfortunately, some dishonest people are using the credit to scam small business owners.

      Let’s discuss what you should know about how to avoid Employee Retention Credit scams and keep your business safe.

      How Employee Retention Credit Scams Work

      Employee Retention Credit (ERC) scams usually start with dishonest people aggressively promoting the tax credit to small business owners who may or may not meet its eligibility requirements.

      They often throw around high numbers to entice you, guaranteeing thousands of dollars in credits for each employee. Of course, before they can help, they need something in exchange upfront, such as money or personal information.

      As if conning business owners out of their valuables wasn’t enough, scam artists also push people into filing for the ERC incorrectly. They may do so in an attempt to take some of the funds or to maintain the ruse that they’re a legitimate service.

      Unfortunately, the Internal Revenue Service (IRS) will identify inappropriate attempts to claim the credit. Even if the filing business was a victim of a scam, they’ll still ultimately be liable for any amounts they received illegitimately, plus penalties and interest.

      The IRS first issued a public notice about ERC scams in October 2022. Since then, it has warned business owners repeatedly, urging caution as recently as March 2023 due to continued observance of scammers misleading people.

      Most Common Employee Retention Credit Scam

      Scam artists use many different tactics in their attempts to defraud small business owners with the ERC. Below is a common one.

      Charging An Upfront Fee To See What You Qualify For

      Perhaps the most common way ERC scam artists try to profit off business owners is to pose as tax experts and offer to help with the credit for an upfront fee. 

      You usually don’t have to pay an upfront fee to determine how much you could be qualified for. That makes it too easy for a scam artist to take your money and disappear without performing the service.

      Legitimate tax professionals typically won’t try to bill you until after completing the work you’ve contracted them to do, especially if they contacted you first.

      How to Avoid Employee Retention Credit Scams

      Falling for an ERC scam can be a painfully expensive mistake, but it doesn’t take too much to avoid them. Let’s go over some of the best steps you can take to protect yourself and your business.

      Educate Yourself on the ERC

      Scam artists tend to prey most on people who don’t have the knowledge to defend themselves. As a result, learning how the ERC works is one of the best ways to guard yourself against people who want to manipulate you.

      You don’t need to be as knowledgeable on the subject as a legitimate tax expert, but you should know enough to navigate the subject comfortably. For example, consider researching eligibility requirements, maximum claim amounts, and the filing process.

      Watch Out For Red Flags

      In addition to arming yourself with knowledge about the ERC, it’s a good idea to learn the telltale signs of a scam artist. For example, here are some of the most common red flags to be aware of:

      • Promising everyone qualifies – While everyone was personally impacted by the pandemic that doesn’t immediately guarantee that everyone qualifies for the ERC. The ERC has specific qualification criteria that a business must be impacted by a government order, not just the pandemic generally.
      • Promising more money than other filers – Scam artists often exaggerate what they and the ERC can offer you. For example, they might inflate your potential claim amount or neglect to inform you that there are eligibility criteria for the credit.
      • Only doing revenue reduction calculations – The majority of businesses qualify based on government orders not on revenue reduction alone, so if government orders aren’t included in the calculation, businesses miss out on potential credit dollars. 
      • Focusing on supply chain disruption – While supply chain disruptions were common throughout the pandemic they don’t automatically qualify a business for the ERC. It must be tied to a government order that limited commerce, travel or meetings due to the pandemic.
      • No government order research – Government orders varied widely by state and weren’t necessarily in place throughout the entire pandemic. True ERC providers will do in depth research into government orders to ensure you are qualified and have proper documentation.

      In addition to learning the specific signs of a scam artist, it’s wise to maintain a cautious attitude when dealing with serious matters like the ERC. Healthy skepticism is often enough to keep you safe and avoid hasty decisions.

      Research and Hire a Trustworthy Tax Professional

      Having a legitimate tax expert on your side, such as a Certified Public Accountant (CPA), is another effective way to protect yourself from ERC scams. You can lean on their knowledge and experience to navigate any uncertainties you experience.

      With their help, it’s easy to comply with regulations and get the maximum credit amount you’re eligible for. If your claim is ever subject to an audit, they can also help defend the ERC portion of the audit and provide additional support.

      Before you hire a CPA, confirm that their license is in good standing and read reviews of their services. It’s also best to set up a free consultation and check that they’re someone you’d want to work with before committing.

      Apply For The Employee Retention Credit

      While you can no longer earn the ERC, you can still claim it retroactively by filing Form 941-X with the IRS. The deadline is April 15, 2024, for quarters in 2020 and April 15, 2025, for quarters in 2021.

      If you’d like help getting started, our free and easy-to-use software can walk you through the initial application. If you’re eligible for the credit, it can also facilitate the filing process and streamline your payout. Give it a try today.

      Learn More: If you’d prefer to read more about the ERC before you proceed, check out some of our other resources:

      About the author
      Nick Gallo, CPA

      Nick Gallo is a Certified Public Accountant and content marketer for the financial industry. He has been an auditor of international companies and a tax strategist for real estate investors. He now writes articles on personal and corporate finance, accounting and tax matters, and entrepreneurship.

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