How Employee Retention Credit Scams Work

Employee Retention Credit (ERC) scams usually start with dishonest people aggressively promoting the tax credit to small business owners who may or may not meet its eligibility requirements.

They often throw around high numbers to entice you, guaranteeing thousands of dollars in credits for each employee. Of course, before they can help, they need something in exchange upfront, such as money or personal information.

As if conning business owners out of their valuables wasn’t enough, scam artists also push people into filing for the ERC incorrectly. They may do so in an attempt to take some of the funds or to maintain the ruse that they’re a legitimate service.

Unfortunately, the Internal Revenue Service (IRS) will identify inappropriate attempts to claim the credit. Even if the filing business was a victim of a scam, they’ll still ultimately be liable for any amounts they received illegitimately, plus penalties and interest.

The IRS first issued a public notice about ERC scams in October 2022. Since then, it has warned business owners repeatedly, urging caution as recently as March 2023 due to continued observance of scammers misleading people.

Most Common Employee Retention Credit Scams

Scam artists use many different tactics in their attempts to defraud small business owners with the ERC. Though the details may vary, they usually fall into two categories. Let’s discuss what they are and how they work.

Charging For ERC Assistance

Perhaps the most common way ERC scam artists try to profit off business owners is to pose as tax experts and offer to help with the credit for an upfront fee. They may ask you for a flat charge or a percentage of your claim amount.

Either way, that should set off alarm bells. You usually don’t have to pay for professional services upfront, especially all at once. That makes it too easy for a scam artist to take your money and disappear.

Legitimate tax professionals typically won’t try to bill you until after completing the work you’ve contracted them to do, especially if they contacted you first. They may ask for a partial security deposit to reserve their services, but even that is often negotiable.

Stealing Personally Sensitive Information

Instead of pushing you to pay them upfront, some scam artists will try to trick you into sharing sensitive personal information, such as your Social Security Number (SSN), so they can steal your identity.

Since the ERC is a payroll tax credit against wages paid to your employees, they may even go after your employees’ identities. However, a legitimate service provider would not need their SSNs to help you apply for the ERC.

In any case, you should always be careful who you share personal information with and how you do so. Whenever someone asks you for private data, pause to make sure they’re trustworthy and using secure communication methods.

How to Avoid Employee Retention Credit Scams

Falling for an ERC scam can be a painfully expensive mistake, but it doesn’t take too much to avoid them. Let’s go over some of the best steps you can take to protect yourself and your business.

Educate Yourself on the ERC

Scam artists tend to prey most on people who don’t have the knowledge to defend themselves. As a result, learning how the ERC works is one of the best ways to guard yourself against people who want to manipulate you.

You don’t need to be as knowledgeable on the subject as a legitimate tax expert, but you should know enough to navigate the subject comfortably. For example, consider researching eligibility requirements, maximum claim amounts, and the filing process.

Watch Out For Red Flags

In addition to arming yourself with knowledge about the ERC, it’s a good idea to learn the telltale signs of a scam artist. For example, here are some of the most common red flags to be aware of:

• Promising everyone qualifies – While everyone was personally impacted by the pandemic that doesn’t immediately guarantee that everyone qualifies for the ERC. The ERC has specific qualification criteria that a business must be impacted by a government order not just the pandemic generally.
• Promising more money than other filers – Scam artists often exaggerate what they and the ERC can offer you. For example, they might inflate your potential claim amount or neglect to inform you that there are eligibility criteria for the credit.
• Only doing revenue reduction calculations – The majority of businesses qualify based on government orders not on revenue reduction alone, so if government orders aren’t included in the calculation, businesses miss out on potential credit dollars. 
• Focusing on supply chain disruption – While supply chain disruptions were common throughout the pandemic they don’t automatically qualify a business for the ERC. It must be tied to a government order that limited commerce, travel or meetings due to the pandemic.
• No government order research – Government orders varied widely by state and weren’t necessarily in place throughout the entire pandemic. True ERC providers will do in depth research into government orders to ensure you are qualified and have proper documentation.

In addition to learning the specific signs of a scam artist, it’s wise to maintain a cautious attitude when dealing with serious matters like the ERC. Healthy skepticism is often enough to keep you safe and avoid hasty decisions.

Research and Hire a Trustworthy Tax Professional

Having a legitimate tax expert on your side, such as a Certified Public Accountant (CPA), is another effective way to protect yourself from ERC scams. You can lean on their knowledge and experience to navigate any uncertainties you experience.

With their help, it’s easy to comply with regulations and get the maximum credit amount you’re eligible for. If your claim is ever subject to an audit, they can also represent you and provide additional support.

Before you hire a CPA, confirm that their license is in good standing and read reviews of their services. It’s also best to set up a free consultation and check that they’re someone you’d want to work with before committing.

Apply For the Employee Retention Credit

While you can no longer earn the ERC, you can still claim it retroactively by filing Form 941-X with the IRS. The deadline is April 15, 2024, for quarters in 2020 and April 15, 2025, for quarters in 2021.

If you’d like help getting started, our free and easy-to-use software can walk you through the initial application. If you’re eligible for the credit, it can also facilitate the filing process and streamline your payout. Give it a try today.

Learn More: If you’d prefer to read more about the ERC before you proceed, check out some of our other resources:

See If You Qualify For The ERC

Lendio’s easy-to-use ERC application is designed to simplify the process at every step. 

_{Information provided on this blog is for educational purposes only , and is not intended to be business, legal, tax, or accounting advice. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. While Lendio strivers to keep its content up to-date, it is only accurate as of the date posted. Offers or trends may expire, or may no longer be relevant.}