What is ERC?

The Employee Retention Credit (ERC) has been a hot topic since 2020, when the Coronavirus pandemic changed the world.  The credit was implemented to aid companies in paying their employees if there was a reduction in gross receipts as a result of COVID-19.  A major requirement to qualify for the credit was that the business’s operations were fully or partially suspended due to a government order, or if a business’s customer base significantly were impacted due to the mandated shutdowns.  This requirement is the main disqualifier of most businesses. 

The Ploy

Once a company determines that they meet the requirements to qualify for the ERC, there are multiple steps companies must take to apply for the credit.  Businesses must first apply for the credit and then amend their federal tax return.  As most business owners don’t have the time to research and complete the necessary steps to apply for the ERC, new ERC service businesses started popping up. These businesses saw the opportunity to assist businesses with getting the tax credit, for a “small fee.”  Most of these firms set their fee as a % of the ERC credit claimed, which, in fact was fairly significant.

The Risks

The problem with a lot of these new companies is that 1) these are not run by financial professionals, and 2) they take an extremely aggressive approach to the qualifying criteria, which puts businesses at risk with the IRS.  Many of the businesses that these new companies have assisted to apply for the ERC, do not actually qualify, which means that they will eventually owe the IRS if they get audited.  And businesses will get audited.  The IRS’s budget just increased significantly, with most of that budget being allocated to increasing the number of audits they can perform on businesses.  The IRS has even publicly stated to watch out for ERC Scammers.  To make it worse, as so many of these ERC businesses have popped up out of nowhere, they are going out of business just as quickly.  So, when it comes time for the IRS to select you for an audit, you won’t have that third party to fall back on for the liability. 

 

At Fortiviti, we assisted our clients in retaining over $1,250,000 in ERC money.  We did not charge our clients for the assistance and extra time it took our team to perform the analysis and apply for the credit as we saw this as a way to help our clients through the difficulties that Covid brought.  We are advising anyone that is being approached by a third party to apply for the Employee Retention Tax Credit to reach out to your trusted bookkeeper or CPA before paying anyone to do this on your behalf.  They understand your business better than any outside party and you want to be sure you’re not taking an aggressive approach that could hurt you in the future.

Written by: Mandy Smith, CPA