Many businesses experienced financial hardship due to the COVID-19 pandemic. To incentivize employers who continued paying their employees during this trying period, the CARES Act introduced the “Employee Retention Credit” or “ERC” for 2020 which has since been enhanced for the 2021 tax year. This potentially sizable payroll tax credit can produce substantial refunds paid to eligible employers who experienced government-mandated shutdowns or a significant decline in gross receipts. Due to the complexity of the calculation, businesses often will hire Tax Credit Specialty firms to prepare these amended payroll tax forms claiming the ERC refunds.
However, watch out! Not all these preparers are looking out for your best interest.
Claiming false credits
The IRS has issued a warning to employers to be aware of these third-party preparers who are taking advantage of the lucrative Employee Retention Credit by misleading clients or claiming false credits. Claiming the ERC when not actually qualifying is one tactic that can leave the employer on the hook for repaying any excess credits received plus penalties and interest. Other bad actors may charge excessive fees upfront or contingent fees based on the actual ERC refunds. Other firms may fail to inform businesses that these ERC refunds are correctly a REDUCTION in wage tax deductions that have been claimed on the business’s federal income tax return. It is also important to consider whether a third-party preparer will be around in the following 3-5 years when the IRS begins to audit these amended payroll forms claiming the ERC. The IRS has already announced that they have extended the normal 3-year statute of limitations to a 5-years statute to give them ample time to examine these ERC tax filings.
Do your research
It is advisable to do your own research first and exercise caution when choosing an outside service provider to handle the preparation of amended tax credit matters. Always be wary of advertised schemes and direct solicitations that sound “too good to be true”. Individuals may report tax-related illegal activities relating to Employee Retention Credit claims directly to the IRS. Ultimately, the taxpayer is still responsible for all information reported on their tax returns.
If you have any questions regarding the employee retention credit, please contact your Wegner CPAs tax advisor.