Did you get a thousand phone calls telling you that you get $26,000 per employee from the government? Free money, no catch? They probably said it was a new program and you qualified for the Employee Retention Credit right there on the phone. It is likely that you were the victim of the biggest scam ever. But there is hope.
History of the Employee Retention Credit
At the beginning of the 2020 pandemic, Congress passed an aid package that had a lot of tax credits and benefits. Everything was wrapped up in one giant 5000-page piece of legislation, which I took the time to read cover to cover. I pulled the rules from the legislation and started making videos to explain all the credits to my clients. I studied the subsequent forms and went over and above to be sure all my clients got the credits they were due when they needed them back in 2020.
But not every payroll provider or tax person went out of their way to be sure everyone got the Employee Retention Credit (ERC). I have had new clients over the past few years say that their last accountant said they either ‘didn’t qualify’, or that it was ‘too risky and they would probably get audited’ if they took it. Really? That is lazy accountant-speak for ‘I didn’t read the rules and it’s really complicated.’ It was really complicated, but explaining complicated tax stuff is my job. Additionally, they changed the rules three times, so different months have different qualifications. The complexity and the fear factor led to the inevitable: scammers.
Scammers Emerge
Fake companies came out of the woodwork in 2023 as the time to get the credit was nearing its close. The credit comes to you as a tax refund, so you only have three years to claim it.
The calls were relentless. Free money! You automatically qualify! Companies in my area were openly recruiting people to go door to door and ‘help people get the credit they deserved’. How could they afford to do this?
They were charging exorbitant rates, charging a percentage of an expected refund (not allowed by IRS), not signing the tax forms and not providing an IRS identifying number (both also not allowed by IRS), and qualifying everyone on odd technicalities. The IRS will not agree at audit time.
How Can You Scam the Government?
How did these scammers think they could get away with scamming the IRS? First, the IRS got way behind during the pandemic. They were working with a skeleton crew and had to invent a way to get stimulus payments, sick pay, and ERC out to everyone quickly.
Second, it was an expedited credit. If you said you qualified, the IRS sent the money and would audit later. A global pandemic was happening. Keeping small businesses afloat by getting money in their hands was more important than qualifying everyone up front. You could plug in all your payroll figures, say everything qualified, and get all your payroll and taxes back as a refund.
Third, you were allowed to amend your payroll tax forms and get the money years later if you didn’t get it during the pandemic. It was still processed as an expedited credit to be audited later.
Finally, by the time the IRS got around to auditing in a year or two, the scam company would be dissolved and the scammers would be sitting on the beach in Belize. It was a scammer’s dream.
IRS Doesn’t Think So
After they hand out the money, the IRS is required to audit a percentage to see how many people properly qualified. If the compliance rate is low, they audit more and more. I took three classes on this credit at the IRS convention in August 2023. Employee Retention Credit scammers were the biggest scam they had ever seen. The IRS doesn’t write the laws, Congress does. And Congress left the IRS a giant mess. Almost every request for ERC coming into the IRS in 2023 was fake.
On September 14, 2023, the IRS announced a moratorium on new ERC applications. They aren’t taking anymore because they are mostly fake. As of December 9, 2023, there are still over a million forms awaiting processing. They are going over every form with a fine-toothed comb.
Did You Qualify?
The IRS stated three separate ways to qualify. Remember that this was a payroll tax credit and you had to have W2 employees to qualify.
First, if you were closed or partially closed by the government, you qualified. Where I live in Arkansas, dine-in restaurants were either closed or had limited dine-in seating for 11 months. If you were closed by the government AND had a reduction in sales, you qualified.
You do not qualify unless you made less money. This is figured on a per quarter basis, starting April 1, 2020 and ending June 30, 2021. If you were limited to 2/3 indoor seating capacity and your take-home meal was the hottest thing in town, you do not qualify only because you were under government closure. You had to make less money than 2019 in each quarter.
Second, not closed by government, but had a significant reduction in sales. In 2020, you needed a reduction in sales by one-half to qualify. This means ALL of your sales. A popular scammer interpretation of the rules was that if a small portion of your business qualified, everything qualified. No. That is simply not true. You could segment your business, but only the affected parts qualified.
For example, I had a medical practice with a small retail area that sold health-related items. The retail sales are a tiny portion of the medical practice’s income. The retail area had a reduction in sales of about 10% for two quarters. The scammers interpreted that as being a significant impact to the entire practice and they said he qualified for all five quarters on 100% of his payroll. There was an extensive spreadsheet to ‘prove’ it. They quoted all kinds of loopholes and laws. But the sad fact is, during the pandemic, medical practices made a lot of money. One small segment making less money did not offset the fact that the practice made more money overall.
Another buzz-word example: Supply-chain. “I had supply-chain issues, that qualifies me.” Nope. You only if you couldn’t operate and made less money overall. All my construction and outdoor activity people made more money. They all had supply chain issues. However, if you could replace product A with product B and made more money, you do not qualify.
Finally, you can qualify for the last two quarters of 2021 if you started your business after February 15, 2020. You do not qualify for other quarters, only those two.
Still confused? The IRS has an interactive tool to help you.
The IRS will resume taking ERC applications in 2024 and most likely extend the date to apply for the credit.
What the Scammers Didn’t Tell You
First, you can’t take the ERC for any PPP money or qualified sick leave money you received. You need to account for the PPP spending and qualify for ERC only on the remaining payroll. If they didn’t detail that, you were scammed.
Second, they may have forgotten to mention that company owners and their close relatives do not qualify. If they used you and your family’s payroll, you were scammed.
Finally, if they didn’t mention that it is taxable income and you need to amend your income tax returns, you were scammed. You are getting reimbursed for payroll and payroll taxes that you paid during the pandemic. You have to go back to your business income tax forms and reduce your deductions for payroll and taxes by the amount you received. Then you need to make the changes on your personal income tax forms. You need to pay the taxes on the increase in income. You may have to pay back personal tax credits like Earned Income Credit or Premium Tax Credit for Health Insurance. If all this wasn’t taken into consideration before you applied for the credit, you may have been scammed.
Good News: You Can Back Out
If you were pressured into filing and you didn’t qualify, you can easily back out. Why would you back out? If you can’t provide complete income information, bank statements, sales and expense receipts, and all books and records from 2019 through 2021 to prove that you had a significant decrease in sales by quarter per IRS standards (not what the free money people said), you should back out.
If you haven’t received the money yet, make a copy of the 941x forms you filed to make the claim. In the left margin of the first page of each quarter’s form, write “Withdrawn.” In the right margin of the first page of each, have an authorized person sign and date it. Write their name and title next to their signature. Fax the forms to 855-738-7609. (I know, who has a fax? Is this the 90s?) The government loves their faxes.
If you have received one or more checks and haven’t cashed them, you can return them. Write “void” on the check, keep a copy or pic, and mail it with the above signed form to:
Cincinnati Refund Inquiry Unit
PO Box 145500
Mail Stop 536G
Cincinnati, OH 45250
If you cashed the checks, you are not eligible to withdraw. It is very likely the IRS will audit you. If you are, you will have the option to withdraw during the audit, however you will owe the money back with interest. I would start planning for that now.
What to Do If You Were Scammed
If you did not qualify for Employee Retention Credit but were convinced to claim it by a high-pressure scammer, it is likely you paid them in advance, and paid a percentage of a grossly inflated refund promise. I had one client write them a check for $9000. He had no idea that it wasn’t a major finance corporation and just scammers using their logo.
So, what do you do? First, see if the company is still around. Do a little investigating and see if you can track down who the scammers are. If you can find one responsible party, you can legally serve them and sue them for the amount you paid them.
Second, report everything you have to the IRS, including the number they called from, email addresses, and every piece of correspondence. Report it on Form 14242. Do not skip this. The only way to find the scammers is to collect a lot of data, and the data needs to come from you.
Conclusion
If you qualified for a ton of free money and it sounded too good to be true, you may have been scammed. Check with a reputable tax professional to review if you feel you are the victim of an ERC scam and report it to the IRS.
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