All business owners have heard the radio ads and received emails and phone calls from salespeople telling them that they qualify for the Employee Retention Tax Credit (ERC). Free and quick money, large amounts of money. Please be careful and very cautious. There are many scams out there preying on business owners. They take a large fee up front and tell the business owner what ever needs to be said to get the owner to agree to file for the credit so that they get their fee. I am seeing the criminal division of the IRS make the abuse of this credit a top focus over the next few years (FINCEN).
When being sold by these ERC salespeople ask yourself these questions:
These scam artists were not in business prior to 2020. They will most likely take your fee, close up shop by 2024 and leave town or be sued by victims and be bankrupt. Their guarantees and agreements don’t protect you if they are gone or have no money.
To qualify for the Employee Retention Credit, you must have:
1) A significant decline in revenue during 2020 (50% from 2019 or 20% in January through September of 2021)
– OR -
2) Orders from an appropriate governmental authority
If you did not have a decrease in the revenues of your business, we strongly recommend consider your qualification for the ERC.
IRS Notice 2021-20 and IRS bulletin IR-2022-183 issued October 19, 2022, provided clear answers to the questions of:
What orders from an appropriate governmental authority may be considered by an employer for purposes of determining eligibility for the employee retention credit? (Section C, question #10).
Answer: Examples listed that DO NOT QUALIFY:
If a governmental order causes the suppliers to a business to suspend their operations, is the business considered to have a suspension of operations due to a governmental order? (Section C, question #12)
Answer: An employer may be considered to have a full or partial suspension of operations due to a governmental order if the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations. – If this happens you had a decrease in revenue. If your business did not close or suspend your operations (and you did continue to pay your employees), then you do NOT qualify for supply chain interruption to qualify for the ERC.
If you do claim the credit, you must amend your 2020 and 2021 business tax returns and remove the payroll expense matching the ERC amounts. (eg. If you received a $300,000 credit, then you have to amend your 2020 and 2021 returns and increase your taxable income by $300,000.) The ERC salespeople are not telling you this fact.
If you claimed a $300,000 credit, the salesperson likely took 30%, $90,000. You now must amend your returns and claim income of $300,000 for 2020 and 2021. Assume your personal tax rate for Federal is 25% and State Is 5%, 30% combined, you owe approximately $90,000 in taxes. You now have $120,000 left of the $300,000 credit. This is the best situation for you if you DO qualify for the credit.
When the IRS audits your payroll tax returns and determines you DO NOT qualify for the ERC because you incorrectly relied upon supply chain or governmental orders to suspend operations, you now face payroll tax penalties for the false payroll tax returns that you amended to get your credit. The failure to pay penalty will cost you $75,000, 25% of the $300,000, before interest, plus you owe the IRS back the $300,000 you should not have received.
It is very likely that business owners who have received the ERC have spent the money. It is not in their savings account. If you did not qualify for the ERC and the IRS audits you, they have 6 years to audit you, you have spent the money and the salesperson has skipped town with your fees. Unfortunately, the ERC is from payroll taxes. These are considered trust fund taxes, meaning, that you cannot file for bankruptcy and have this go away, these taxes are exempt from being discharged in bankruptcy.
I apologize for the alarm and tone of my warning. The ERC will be one of the biggest financial scandals in our lifetime. Remember that if it is too good to be true, it probably is.
If you have been approached by or worked with someone that you paid for you to obtain the ERC and you did not have a decrease in revenues, please contact me. It will be a confidential conversation where I can give you guidance.
Jeff Forrestall CPA, CFF, CFE, ABV, CVA, PFS
Master’s degree in Fraud and Forensic Examination
Forrestall CPAs, LLC