On September 14th, 2023, the IRS released their IRS Newswire IR-2023-169 for the immediate stop to the new Employee Retention Credit as they were flooded with fraudulent claims, or as the IRS wrote “questionable claims”. This stop would be at least until the end of the year.
This moratorium happened less than ten days after an extremely well written article from The Wall Street Journal (only to read that article the membership might be worth it) that listed how an ERC mill called Bottom Line from Florida got an army of “member” (around 52,000 based on the article) that would reach out to neighbors, local business or any businesses through cold calling or mail, to get a percentage of the ERC received. The article mentions that this company provided $6 billion to clients and got fees from those clients of around $1 billion (usually 15% to 25% of the tax credit, and provides 10% of its fee to the “members” or affiliates). This scam is even promoted by Kevin O’Leary, famous for his Shark Tank participation or being the former FTX spokesman (we all know how that scam ended, with the crypto company in bankruptcy and some of their management in jail). Kevin O’Leary’s firm WonderTrust has submitted roughly $140 million in ERC getting his “cut”. This operation reminds us of all the fintech companies that operated during the Paycheck Protection Program (PPP) that resulted on congressional reports pointed that these firms “fueled PPP loan fraud” and made massive profits.
Based on a Piper Sandler estimate mentioned in the WSJ article, “… the IRS paid more than $150 billion in ERC refunds through early March, and the money is still flowing. Total payments through July could be $220 billion, with another $120 billion in the pipeline“.
You can read the article – Inside a Sales Army Turning a Tax Break Into a Modern-Day Gold Rush
From the IRS Newswire IR-2023-169, the IRS Criminal Investigation has already uncovered suspected pandemic fraud for $8 billion stating “… As of July 31, 2023, IRS-CI has initiated 252 investigations involving over $2.8 billion of potentially fraudulent Employee Retention Credit claims. Of those, fifteen of the 252 investigations have resulted in federal charges. Of the 15 federally charged cases, so far six matters have resulted in convictions, four of those cases have reached the sentencing phase with the average sentence being 21 months.”
For the business owners that filed for this Employee Retention Credit, the IRS will probably audit a number of these payroll amended returns, so be prepared for the possibility of having to support your claim.
To provide peace of mind to the micro and small business community, there are some recommendations:
- If you claimed your ERC and you are confident that the amount of refund was correct (i.e. claim supported by reduction of gross receipts of 50% in 2020 and 20% in 2021 – that should be easy, either there was the reduction in the quarter or not) , then, no more actions.
- If you claimed your ERC and you are unsure on how you got to the refund amount or not sure if you used a reputable third party, then, going through the IRS Eligibility Checklist might be a good starting point.
- If you claimed your ERC based on a) specific government order / government shutdown or b) supply chain issues, then, you should read the FAQs for “Qualifying government orders” and “Supply chain” .
- Note that for the government order you need an economic impact (FAQ Q5) that reads “... your business was suspended by a governmental order. The IRS considers “more than nominal” to be at least 10% of your business based on either the gross receipts from that part of the business or the total hours your employees spent working in that part of the business.“
- Note that for the supply chain, you will have to keep detailed information on how the organization was affected, supplier impact and other similar information (example: Wholefoods might have been impacted by the supply chain on certain products, but if they kept the business up and running with other ones, then, they cannot claim ERC as there was not really an economic or business impact).
- If you want to get more technical, there is a recent IRS legal advice memorandum AM 2023-05 that expands on the supplier issues (Q&A in Notice 2021-20) giving some scenarios and then, some conclusions on each scenario.
In case any IRS agent (or even the commissioner Danny Werfel) was reading this post, we have some recommendations:
- Act against these ERC mills based on available public information – There are communications in writing (letters or scam letter that look like IRS official letters) with the address, name and other information on these scam organizations. Even if IRS agents mentioned that they cannot target an individual company based on an article and that they would need a whistleblower inside the organization, we consider that the scam and fraud is happening in front of the eyes of the IRS (available public information) and that these organizations will disappear and the small business owner will be on the hook for employment payroll taxes (not removed in bankruptcy).
- Act against these ERC mills based on Form 14242 to report an abusive tax avoidance scheme and tax return preparers who promote such schemes (note that at the time of this post, the IRS link to the Form 14242 was not loading and an error message ” Please wait…” appear on the IRS website). If you have information from taxpayers that got scammed, please, use the enforcement tools to go after these bad actors.
- Act against these ERC mills based on information in your databases or ERC manual paper based approval process. Recently, the IRS rejected one of our clients valid ERC refund as they claimed that the ADP power of attorney was not on the system to authorize the 941x. As a result, the IRS could run a data mining to detect what 941x where not filed by the company that filed the original 941. We have heard scary stories about claims or 941x amendments done by third parties without authorization or knowledge of the business owner (some of these cases directly from an IRS officer during one of our examination meetings). If a third party filed the 941 amended (941x) and not the usual third party payroll service or usual internal party, then, there is a high probability that an ERC mill was involved. For example, CPAs cannot charge a commission or contingent fee based on tax return refund. Additionally, the IRS advises that “… Taxpayers should avoid tax return preparers who base their fees on a percentage of the refund.“
- In the future, provide easier guidance based on quantitative data such as the first way to qualify for ERC (gross receipts decline of 50% in 2020 or 20% in 2021) and avoid the qualitative or hard to determine eligibility such as government shutdown or supply chain (a stronger reference to the nominal impact – 10% reduction on gross revenues or hours would have avoided many of these fraudulent claims where these ERC mills consider that everyone qualified due to these qualitative factors).
Link Article Journal of Accountancy – Moratorium imposed on new ERC claim processing to curb abuse
Link Article Journal of Accountancy – ‘Tsunami’ of ERC claims required IRS action to halt fraud, experts say
Link Article Journal of Accountancy – ERC abuse brings renewed push for regulation of paid tax preparers