IRS Notice Urges Taxpayers Not to Fall for This Scheme: ‘Think Twice’

A 1040 form used by U.S. taxpayers to file an annual income tax return in a file photo. (Joe Raedle/Getty Images)

The Internal Revenue Service (IRS) issued a “renewed warning” on Tuesday, calling on people to be aware of employee retention credit guidelines amid widespread promotions that push “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.”

He added that: “if the tax professional they’re using raises questions about the accuracy of the Employee Retention Credit claim, people should listen to their advice. The IRS is actively auditing and conducting criminal investigations related to these false claims. People need to think twice before claiming this.”

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 was issued Tuesday because the IRS and tax professionals keep seeing third parties “aggressively promoting” ERC schemes via the “radio and online.” These groups, it said, charge significant upfront fees or a fee that is contingent on the refund amount.

And such “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 said.

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, Reuters reported.

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.

“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 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.”

The IRS said that its internal Office of Professional Responsibility will come out with guidelines on how to deal with the schemes, according to the tax agency.

Two trade groups last month issued a letter (pdf) 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.

Reuters contributed to this report.