IRS Notice Urges Taxpayers Not to Fall for ‘Aggressive Marketing’

The IRS can require payment facilitators to send millions of additional Form 1099-Ks to middle-class taxpayers and small businesses and still honestly say that it hasn't increased its audit level. (Hapabapa/iStock/Getty Images)

The Internal Revenue Service (IRS) recently sent out another alert warning employers and taxpayers of possible scams around misleading claims involving the employee retention credit.

In a news release, the agency said that it and independent tax professionals “continue to see a barrage of aggressive broadcast advertising, direct mail solicitations and online promotions involving the Employee Retention Credit,” adding that while the credit is real, “aggressive promoters are wildly misrepresenting and exaggerating who can qualify for the credits.”

The IRS indicated that it will step up its auditing of those employee-related claims, which were implemented during the COVID-19 pandemic. It warned that taxpayers who improperly try to obtain the credit could face “follow-up action” from the tax agency and that it has boosted its staffing around the issue

“The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others,” IRS Commissioner Danny Werfel said in the release. “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.”

If a taxpayer improperly claims the employee retention credit, or ERC, they could be required to repay the credit and pay higher interest. Penalties may also be applied, the IRS warned.

The renewed warning comes amid reports of third parties aggressively promoting ERC schemes via social media, websites, and radio. Such groups, the agency previously said, could charge significant upfront fees or a fee that is contingent on the refund amount.

“This continual barrage of marketing by advertisers means many invalid claims are coming into the IRS, which also means it takes our hard-working employees longer to get to the legitimate Employee Retention Credits,” Werfel, an appointee of President Joe Biden, continued to say. “The IRS understands the importance of these credits, and we appreciate the patience of businesses and tax professionals as we continue to work hard to get valid claims processed as quickly as possible while also protecting against fraud.”

Warning Signs

Over the past several months, the agency has been issuing news releases warning about ERC scams. According to the IRS, there are warning signs around the employee retention credit that people should be wary of.

They include “unsolicited calls or advertisements” about an alleged “easy application process,” statements that a company or promoter can figure out an individual’s ERC eligibility within a few minutes, large upfront fees, fees based on the refund amount, “aggressive claims” before any discussion of a group or individual’s respective tax situations, and more.

“In reality, the Employee Retention Credit is a complex credit that requires careful review before applying,” the release said. “The IRS also sees wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay the credit—along with substantial interest and penalties.”

Internal Revenue Service (IRS) commissioner nominee Daniel Werfel testifies before the Senate Finance Committee during his nomination hearing in Washington on Feb. 15, 2023. (Kevin Dietsch/Getty Images)

It noted that taxpayers should instead work with a trusted or reputable tax professional and not use the “advice of those soliciting these credits,” adding: “Promoters who are marketing this ultimately have a vested interest in making money; in many cases they are not looking out for the best interests of those applying.”

What It Is

The ERC is a refundable tax credit for businesses that paid employees while they were shut down due to COVID-19-related lockdowns and other rules that caused declines in gross receipts between March 13, 2020, and Dec. 31, 2021, according to the IRS. Some employers can claim the ERC on a tax return within those dates, the agency said.

The ERC was included in 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 the payroll during the months of 2020 affected by COVID-19.

When initially introduced, this tax credit was worth 50 percent of qualified employee wages but limited to $10,000 for any one employee, granting a maximum credit of $5,000 for wages paid from the aforementioned time period. It has since been updated, increasing the percentage of qualified wages to 70 percent for 2021. The per employee wage limit was increased from $10,000 per year to $10,000 per quarter.

The credit is available to all eligible employers of any size that paid qualified wages to their employees, however different rules apply to employers with under 100 employees and under 500 employees for certain portions of 2020 and 2021.

While the IRS has been issuing alerts about these alleged schemes since last year, there are still attempts to claim the ERC during the 2020 filing season. Meanwhile, tax filing services and professionals have said they are being “pressured by people wanting to claim credits improperly.”

Reuters contributed to this report.