IRS issues additional warnings against aggressive ERC claims

The IRS continues to urge taxpayers to avoid engaging with employee retention credit (ERC) “credit mill” firms that are “aggressively promoting … ERC schemes on radio and online.” (IR-2023-40)

Key takeaways

• IRS criminal investigations are ongoing. The IRS is actively auditing and conducting criminal investigations related to these false, and in some cases fraudulent, claims.
• ERC promoter claims open the IRS’ 2023 “Dirty Dozen” tax scam list.

Background

One of the two principal means for qualifying for the ERC is via the “suspension test,” which is met if an employer experiences a full or partial suspension of, or modification to, their business during any period between March 13, 2020, and Sept. 30, 2021. This suspension or modification must be the result of orders from an appropriate domestic governmental authority (federal, state or local) limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19. 

The suspension test is highly subjective and critically dependent on each employer’s facts and circumstances. This creates a significant gray area and, in turn, myriad challenges to taxpayers and practitioners in attempting to analyze whether the criteria have been met (for additional details, please see our 2021 year-end tax letter article). This gray area has also provided a space for certain firms to aggressively promote the idea that all businesses qualify for the credit, on the premise that no business was spared the effects of the pandemic. This, as the IRS points out in its latest warning on the issue, is categorically false.

Renewed aggressive eligibility position warnings

The IRS first alerted taxpayers to the dangers of pursuing ERC claims in October of last year, in response to concerns raised by the AICPA and the accounting industry at large. Despite this awareness campaign, which has included the IRS urging taxpayers to report tax-related illegal activities relating to ERC claims, credit mill firms remain undeterred from espousing often baseless eligibility positions. On March 7, 2023, the IRS renewed its call for taxpayers in a news release (IR-2023-40) to refrain from engaging with firms that are “aggressively promoting … ERC schemes on radio and online.” The Service does not include any new technical guidance regarding the credit, but former acting IRS Commissioner Doug O’Donnell warns that it “is actively auditing and conducting criminal investigations related to these false claims.” (Emphasis added.)

Further, on March 20, 2023, the IRS kicked off its “Dirty Dozen” campaign for the year by adding ERC promoters’ eligibility claims to the list. The Dirty Dozen is an annual list published by the IRS of “12 scams and schemes that put taxpayers and the tax professional community at risk of losing money, personal information, data and more.” In its latest entry, the Service notes it “is stepping up enforcement action involving these ERC claims, and people considering filing for these claims — only valid during the pandemic for a limited group of businesses — should be aware they are ultimately responsible for the accuracy of the information on their tax return. The IRS Small Business/Self-Employed division has trained auditors examining these types of claims, and the IRS Criminal Investigation Division is on the lookout for promoters of fraudulent claims for credits.”

It remains critical, now more than ever given the IRS’ increased attention to this matter, to be aware of the dangers of pursuing the ERC per the advice of credit mill firms. However, taxpayers who are legitimately eligible for the credit should not be discouraged from claiming it, though they should be aware, the current landscape invariably increases the odds of an audit. Successfully defending an IRS challenge still has its costs (time and effort on the part of the taxpayer, advisory fees, etc.), that must be considered when deciding whether to pursue the ERC.

Please reach out to your Baker Tilly advisor if you have any questions or concerns regarding the above.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.