IRS Updates ERC FAQs to Tackle Fraud

You may have heard that the Employee Retention Credit (ERC) has been seeing a lot of fraudsters trying to scam businesses by collecting their information and telling them they are eligible for the ERC tax credit when they're not. 

The IRS has released new FAQs as part of its continuing efforts to warn taxpayers of ERC fraudsters. The latest update contains information to help educate business owners regarding qualifying government orders, the decline in gross receipts, recovery startup businesses, and when taxpayers can expect an ERC refund. 

Employee Retention Credit Fraud

It's critical to watch out for scammers and fraudsters who use various tactics to mislead people into believing they meet the requirements for the Employee Retention Credit while charging them excessive fees– typically thousands of dollars.

These scammers will lie about the requirements and documents needed to comply with the ERC and potentially take your credit and identity information. Some things to watch out for to indicate fraud are aggressive marketing, direct mailing, and vague documents leaving out essential information.

Be safe and cautious with whom you give your information. The best way to claim the Employee Retention Credit is on your federal tax return. Although, the IRS believes the percentage of eligible businesses claiming the ERC continues to decline.

Your Government Order Shouldn't Be From a Third Party

Be aware that the government order document you submit should be a copy of the actual government order. The IRS warns taxpayers that they shouldn't accept a generic document about a government order from a third party. The order should be reviewed to determine if it applies to the taxpayer's business.

Qualifying Government Orders for the ERC

The IRS's FAQ explains that for a business to meet one of the qualifications for the ERC, they have to have experienced a full or partial shutdown government order due to the pandemic and, as a result, could not operate.

This can be either a federal, state, or local order. It notes that a government recommendation is insufficient to satisfy the requirement. Some eligible examples include: 

1. Your business couldn't operate as usual due to an order from the city's mayor stating that all non-essential businesses must close for a specified period.
2. A state's emergency proclamation that residents must shelter in place for a specified period, except for essential workers, caused the closure of your business. 
3. An order from a local official imposing a curfew on residents that impacts the operating hours of your trade or business for a specified period.
4. An order from a local health department mandating a workplace closure for cleaning and disinfecting.

Your Business Needs More than a Government Closure Recommendation 

It's important to note that merely receiving a recommendation to close your business from a government authority is insufficient to comply with the ERC. You have to have a specific government order enforcing your business's pandemic closure.

Recommendations or suggestions at a state or local level are not enough, as you're not forced to comply with a suggestion.

Remote Operations Don't Qualify for the Employee Retention Credit

Suppose your business was able to partially or fully sustain operation during the shutdown order using remote workers. It will not qualify for the ERC in that case, as you didn't entirely shut down. 

The IRS notes that if your customers were affected by a stay-at-home government order, but no government order applied to your suspending business operations, you wouldn't be eligible for the ERC.

Another example is if you voluntarily closed your business or reduced hours of operation, you're not eligible because you aren't following a government order suspending operations.

However, you could still qualify for ERC based on a decline in gross receipts even if you don't qualify under suspension of operations due to a government order.3

A Decline in Gross Receipts

You may qualify for the ERC if you suffered a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021. 

You can check this by comparing your receipts during this pandemic to those of the same previous 2019 quarter. 

Receipts Must be 50% Less than the Previous Year's Same Quarter.

If your receipts in 2020 were less than 50% of the gross receipts of the same quarter in 2019, then you may qualify for the ERC. However, if your gross receipts go up to 80% more than the same quarter in 2019 during the next quarter, you wouldn't comply with the ERC.

For 2021, the gross receipts for the quarter must be less than 80% of the gross receipts for the same quarter in 2019 to qualify.

Remember, your business needs to keep thorough receipts and sales records.

Recovery Business Eligibility

A "recovery startup business" is a business or organization that began carrying on a trade or business after February 15, 2020, and had average annual gross receipts of $1 million or less for the three years preceding the quarter for which they are claiming the ERC.

A recovery startup business can claim ERC only for the third and fourth quarters of 2021. These businesses cannot qualify using the government order or decline in gross receipts test. A recovery startup business may claim a maximum of $50,000 in ERC.

Learn More

Be cautious of the many scams and frauds surrounding Employee Retention Credit eligibility. Make sure to go through the correct avenues to claim this credit, and don't give your information to third-parties systems. 

Fortunately, legislation to combat ERC fraud and error is on the horizon. This could entail an earlier end date for claiming the ERC credit. Generally, the deadline for the 2020 tax period is April 15, 2024. For the 2021 tax period, the deadline is April 15, 2025.

To learn more, read the IRS FAQ for more information regarding the Employee Retention Credit. 

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