What Are ERC Scams & How Do I Avoid Them?
Want to file for the Employee Retention Tax Credit but are wary of scams? Read this guide to protect yourself from ERC scams and fraud.
As of 9/14/2023, the IRS has temporarily paused processing new employee retention tax credit claims due to a swell of ERC scams and questionable claims. Existing claims are still being processed and eligible businesses can still submit an ERC claim through reputable ERC specialists to be processed when the moratorium ends. Visit our full breakdown of the ERC pause for the latest information.
The Internal Revenue Service has recently warned about ERC scams as more small business owners are taking advantage of this tax credit. How do you avoid being scammed if you’re a small business owner that has claimed or is planning to claim the ERC tax credit?
In this post, we’re going to dive into ERC scams. We’ll explore what ERC scams are, how to avoid being scammed and offer resources for claiming your ERC tax credit.
Keep reading to learn more about ERC scams and how to avoid them.
Table of Contents
What Is The ERC? The Quick Answer
The Employee Retention Credit (ERC) is a refundable employment tax credit created to relieve small business owners affected by the COVID-19 pandemic. This credit is available to be claimed by businesses with employees that were fully or partially shut down due to a government order or that can demonstrate a decline in gross receipts in 2020 and 2021.
Small business owners that didn’t take advantage of the ERC when filing their quarterly tax returns in 2020 and 2021 can retroactively receive the ERC credit by filing amended quarterly returns.
Qualified taxpayers will then receive a refund check directly from the IRS.
What Are Employee Retention Credit Scams?
The IRS has issued a notice warning employers of employee retention credit scams.
These scams involve a third-party company or individual contacting small business owners about claiming the ERC. These scammers tell small business owners that they qualify for the ERC or qualify for a higher refund without verifying eligibility, documentation, or other information.
Scammers may claim to be accountants, tax professionals, or even representatives of the IRS.
These third parties request a payment upfront in exchange for claiming the ERC on behalf of the small business owner.
The fee is typically 20% to 25% of the ERC refund the scammers say the small business owner will receive. The ERC is filed on the small business owners’ behalf, and the IRS may issue a refund check within the next several months.
The problem is that these companies and individuals are fraudulently filing ERC claims. The small business owner may not qualify at all, or they may not qualify for the full amount promised by the scammer. When the IRS discovers this, the small business owner will be responsible for repaying any refund overages and other penalties.
While the IRS may pursue the third-party scammer, the small business owner whose name is on the claim will ultimately be held responsible.
Luckily, there are several trustworthy ERC companies available to help you get your ERC refund. We’ve also put together even more tips to help you avoid ERC scams and fraud.
Look For These Red Flags To Identify Potential ERC Scams
If you’ve been contacted by a business or individual that promises an ERC refund, a few red flags can help you identify a scam. Be wary of companies that:
- Don’t have an online presence or appear to be a very new business
- Only want to communicate through email or online chats
- Promise to get you an ERC refund or a higher refund without reviewing your records
- Don’t offer audit protection
- Apply high-pressure tactics, such as frequent phone calls or short deadlines to file
- Refuse to sign their name as the preparer of your amended return
These aren’t the only signs of an ERC scam.
Do your research, trust your gut, and always seek the second opinion of a reputable professional before engaging in business with any ERC funding company.
6 Tips On How To Avoid ERC Scams
Let’s be clear that the ERC itself isn’t a scam, and many third-party ERC services are also completely legit.
Instead, some bad actors are looking to take advantage of small business owners.
Here’s how to identify these scammers and how to avoid ERC scams.
Talk To An Accountant About The ERC
Before working with anyone that promises ERC refunds, talk to your accountant or research reputable accountants in your area to discuss the ERC. If your accountant tells you that you don’t qualify for the credit, but another company pushes you to claim the credit, it’s best to trust your accountant.
An accountant can help you understand if you qualify for the ERC (more on that in a minute) and how much you qualify to receive. A trademark of a scammer is telling you that you qualify without looking at your payroll records or gross receipts or giving you an inflated refund amount that doesn’t align with your accountant’s (or your own) calculations.
Understand How To Qualify For ERC
While it’s wise to talk to an accountant or other ERC expert, do your research about the ERC. With a basic understanding of how to qualify for the ERC, it’s easy to weed out scammers. For example, if you don’t have any employees, but someone is telling you to file anyways, this is a sign of a scam. If someone gives you an estimate of your ERC refund without reviewing your records, you’re likely dealing with a scammer.
Unsure if you qualify for the ERC? Find out if you qualify for the employee retention tax credit.
Claim The ERC Yourself
Of course, you can always claim the ERC for yourself if you qualify. Instead of relying on a third-party company to claim your ERC, you can file your own amended quarterly return.
Learn more about how to claim the ERC on your taxes if you want to go the DIY route.
Report Fraudulent ERC Communications To The IRS
Some businesses have reported receiving fraudulent communications from the IRS about the ERC. These phone calls or emails may pressure recipients to apply for the ERC, even if they aren’t eligible.
If you receive an email from the IRS that you believe is fraudulent, you can report it by forwarding it to [email protected]. If you receive a phone call from the IRS, hang up and contact the IRS at 1-800-829-1040.
Do Your Research On ERC Funding Companies
Unfortunately, scammers have given ERC funding companies a bad reputation. While you need to be on the lookout for sketchy scam artists, it’s important to know that there are legitimate ERC funding companies. If you opt to hire a third-party company to claim your ERC, make sure to do your research. Look at reviews, time in business, Better Business Bureau complaints, and other information to determine if a company is legit.
You can start your search for a reputable company by checking out the best ERC services for businesses.
Don’t Pay Cash Upfront To ERC Funding Companies
ERC scammers get their money from their victims by demanding payment upfront. This leaves the small business owner waiting months (or even as long as a year) to receive their refunds. Even worse, these refunds could be found to be fraudulent, and the small business owner is left to repay the refund plus any penalties imposed by the IRS.
Let’s clarify that ERC funding companies charge fees for their services. But most reputable companies will take their fee only after the refund has been issued. Others may offer an option to pay upfront in exchange for lower fees. However, this may also be a sign of a scam. Make sure to do your research and be wary of any business requesting payment upfront to claim your ERC, especially if there are other red flags.
How To Stop ERC Spam Calls & Other Communications
Everyone wants to cash in on ERC — including ERC companies that charge business owners a fee for claiming the credit on their behalf. Unfortunately, as a result, these companies often cold-call, send numerous mailers, spam email inboxes, or send numerous communications to business owners.
These business owners may have signed up for a free ERC analysis or, in some cases, didn’t contact anyone at all. For example, there are numerous negative reviews about unsolicited ERC Pros phone calls, emails, text messages, and mailers.
If you’re getting bombarded with ERC phone calls, texts, emails, or mailers, here’s what to do to stop these communications.
The Bottom Line On ERC Scams
Employee retention is a legitimate tax credit that can help small business owners put thousands of dollars back into their pockets. Unfortunately, not every small business qualifies for the tax credit, and ERC scammers are taking advantage of this.
While the promise of a big refund seems alluring, these scams can ultimately be very costly for your business.
You can avoid these scams by knowing what to look for, doing your research, and even tackling the ERC yourself. Good luck!