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The IRS is cracking down on a popular small business tax break that could lead to a costly audit

  • Specialist small business consulting firms have sprung up to help business owners claim the Employee Retention Credit, a governmental tax incentive intended for companies stressed by the pandemic.
  • The Internal Revenue Service has become skeptical of ERC claims, especially given how easy it has become to file for the credit.
  • Fraudulent claims involving the ERC were added by the IRS to its annual ‘Dirty Dozen’ list of tax scams, and the risks of a costly audit are now elevated for firms that improperly claim the credit.

A cottage industry of specialist firms has sprung up to help business owners claim the Employee Retention Credit (ERC), a governmental tax incentive intended for companies stressed by the pandemic. But businesses need to be careful not to get hoodwinked.

There are strict eligibility requirements for the ERC — one way it can be claimed is for wages paid during pandemic periods when gross receipts declined — and many owners may not really understand the criteria. This means they could inadvertently gloss over the opportunity and lose out on credit of up to $26,000 per employee. Or, they could easily be duped by dodgy providers into improperly seeking money they aren’t entitled to — with a hefty fee attached, of course — and likely ramifications down the road.

The problem is particularly pervasive given how easy it is to file for the credit and dupe small businesses in the process, said Donald N. Hoffman, a partner with Eisner Advisory Group. “Every business owner is getting dozens of emails and mail and being bombarded by television ads,” he said.

To be sure, the IRS warned business owners last October to be on the lookout for third parties promoting improper ERC claims. It renewed that warning in March of this year given what it said in a release “continue to be promoters who aggressively mislead people and businesses into thinking they can claim these credits.”

The IRS went so far as to add fraudulent claims involving the ERC to its annual “Dirty Dozen” list of tax scams.

“The aggressive marketing of these credits is deeply troubling and a major concern,” said IRS Commissioner Danny Werfel in a release. “There are very specific guidelines around these pandemic-era credits; they are not available to just anyone.”

These promotions may rely on inaccurate information about eligibility or how the credit is calculated, the IRS said. What’s more, some of these advertisements are designed to collect a taxpayer’s sensitive information, which is then used for identity theft purposes, the IRS said.


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