On Tuesday, the Internal Revenue Service issued a “renewed warning,” calling on people to be aware of employee retention credit guidelines amid widespread promotions pushing “ineligible people to file” for the credit.
“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,” said acting IRS Commissioner Doug O’Donnell in a notice. “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,” O’Donnell continued. “The IRS is actively auditing and conducting criminal investigations related to these false claims. People need to think twice before claiming this.”
The IRS warned that if a taxpayer improperly claims the employee retention credit, they could be required to repay the credit, pay higher interest, and may even face penalties.
Tuesday’s warning comes due to the fact that the agency and other tax professionals keep seeing third parties “aggressively promoting” ERC schemes via the “radio and online.” These groups reportedly charge significant upfront fees or a fee that is contingent on the refund amount.
“The promoters 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 release added.
The ERC “is a refundable tax credit for businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to Dec. 31, 2021. Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within those dates,” according to the IRS.
The ERC was part of a massive pandemic spending package, known as the CARES Act, which was passed in early 2020. It was created by Congress to encourage businesses and employers to keep their employees on payroll during the months of 2020 most affected by COVID-19.
Initially, the credit was worth 50% of qualified employee wages, but limited to $10,000 for any one employee, granting a maximum credit of $5,000 for wages paid during the previous time period. Since that time, it was updated to increase the percentage of qualified wages to 70% for 2021. The per employee wage limit was increased from $10,000 per year to $10,000 per quarter, Reuters reported.
The credit is available to all eligible employers of any size that paid qualified wages to their employees, but different rules apply to employers with under 100 employees and under 500 employees for certain portions of 2020 and 2021.
“As a reminder, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021. Additionally, for any quarter, eligible employers cannot claim the ERC on wages that were reported as payroll costs in obtaining PPP (Paycheck Protection Program) loan forgiveness or that were used to claim certain other tax credits,” the agency also said Tuesday.
While the IRS has been issuing alerts about these alleged schemes since last year, there are still some who attempt to claim the ERC during the 2020 filing season. Tax filing services and professionals have said they are being “pressured by people wanting to claim credits improperly.”
Two trade groups last month issued a letter to the IRS and O’Donnell, asking the agency to offer guidance on the credit. “While the IRS has issued numerous ERC filing warnings … these are directed at employers, taxpayers, and employees, not tax professionals,” it said.
The IRS said its internal Office of Professional Responsibility will soon release guidelines on how to deal with the schemes.
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