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Tax Experts Warn of Employee Retention Credit Audits

S.J. Steinhardt
Published Date:
Sep 6, 2023

Repeated IRS warnings about fraudulent Employee Retention Credit (ERC) schemes have not deterred unscrupulous promoters from falsely advertising their ability to obtain the credit for almost anybody, Accounting Today reported.

The ERC is a refundable tax credit for businesses that continued to pay employees while shut down due to the COVID-19 pandemic or that had significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021. The IRS has repeatedly warned businesses and tax-exempt groups to be wary of companies and individuals who falsely tell them that they are eligible for the credit.  

"The aggressive marketing of the ERC continues preying on innocent businesses and others," IRS Commissioner Daniel Werfel said in May. "Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit."

In late July, Werfel told a tax conference that the IRS planned to  implement additional procedures to root out fraudulent ERC claims. He said that the IRS has increased audit and criminal investigation work on these claims, both on the promoters as well as those businesses filing dubious claims.

Accounting Today noted that even if CPAs didn't calculate a fraudulent ERC refund claim, they may still face a malpractice claim if they prepared a tax return that reflects one.

Employers who have filed for a refund should know that the IRS has a set period of time to challenge the refund and recoup the money, tax attorney Barbara Weltman, author of "J.K. Lasser's Small Business Taxes 2024," told Accounting Today.

"For the credit related to the third quarter of 2021, the IRS usually has until April 15, 2025, to act," she said. "But the IRS can file a lawsuit within two years of payment, even if later than the usual three-year statute of limitations.”

“I think that, for the most part, those taxpayers [whose businesses were suspended during the pandemic] knew they qualified and have probably already claimed the credit contemporaneously with the pandemic,” James Creech, senior manager with the tax advocacy and controversy group at Baker Tilly, told Accounting Today. 

Many of the so-called ERC mills, trying to make money from the ERC program while it is available, will disappear without paying for an audit defense once it is over, according to Creech. 

"Now we're moving past the pandemic and there's an incentive to get this money under more and more questionable circumstances," he said. "So I think people are stretching a bit and that there is a significant risk. People are going to look at getting the money, as opposed to doing the rigorous analysis required to get to a comfortable position that you do qualify. And I think there's a lot of taxpayers who are going to realize too late that they probably didn't qualify after they've already claimed the credit. This is true especially now, if they use people that advertise on the radio, that probably charge a contingency fee."

Creech also noted a shift in the audits. "When you get audited for an ERC claim, one of the things the government wants is to speak to the taxpayers themselves,” he said. “They want to speak to somebody with firsthand knowledge of the business operations, and most likely that's the owner. One of the things they're really focusing on in this interview is, 'How did you learn about the credit? Who do you know who did the credit eligibility calculation?'

Many of these audits are those of refund claims, so there has not been any cash paid for the particular quarter that is under examination, which means the onus is on the taxpayer to prove that he or she is eligible, Creech explained. These audits are “very intensive, very fast where the auditor comes in and says, 'You know, I'm giving you a limited amount of time to demonstrate to me that you are entitled to this. So the taxpayer who finds they're under audit should reach out to a professional within a matter of hours. No response means no credit, because you didn't justify it."

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