I Am Ticked

It Takes A Lot to Rile Me Up.

And like our cat Astro here, I Am Ticked

The old adage, “If it sounds too good to be true, it probably is”?really needs to become a litmus test for all business owners this year.

I got hooked on taxes back in 1993-1994 during my first tax season when I saw how much I could help people who missed out on legitimate deductions and overpaid their taxes every year. In fact, in that first season my initial project was amending three years of my own tax returns to recapture deductions that a well-meaning but uninformed accountant said I could not take.

Since then, I’ve done my own deep research into the tax code for nearly 30 years to find tax-savings opportunities, including challenging the incorrect application of tax law by a major employee benefits company that was limiting the deductions their customers could use (and having their internal legal department agree with my analysis and changing that specific program) and walking out of our city’s largest CPA firm after meeting with their senior partner who said there was no way to avoid taxes on the sale of one of our businesses (he had never heard of the two parts of the tax code that I found and cut our tax bill to zero on most of the sale and by 50% on the remainder.)?But these are stories for another time.

Despite repeated warnings from the IRS?and the tax professional community, many business owners are being SCAMMED by Employee Retention Credit (ERC) “mills” that wave the promise of tens or hundreds of thousands of dollars of “free refunds” from the ERC just by using their service.

And these scams tick me off.?There are far too many "green lights" in the tax code to put business owners and their families at risk with unqualified ERC claims.

I’m all for taking legitimate action on tax savings opportunities – in fact, that’s the core part of our services. And we have a qualified and reliable partner we work with specifically for the ERC and other credits.

But these mills are creating significant issues for the taxpayers who use them and are getting aggressive with their high-pressure sales tactics.?I’ve had clients and associates reach out to me over the last two weeks asking about emails, phone calls, and even texts that they are receiving from these ERC “experts” – many of whom have NO tax experience, dangling the promise of free money from the ERC – but are stretching (or even disregarding) the requirements for a business to qualify.

Why are they so aggressive??Unlike other tax-related services, the ERC falls into a small group of tax services that the government allows advisors to charge a “contingent” fee – or percentage of the refund or recovery amount.

In most cases, it is illegal for a tax professional to base his or her fee on the amount of a refund or tax savings. There are exceptions to this rule: ERC is one of them.

It’s far more lucrative for an unscrupulous promoter to use this subset of services that qualify for a percentage fee than to provide eight or ten hours of services at $200 or $300 an hour.?Even a small ERC credit of $150,000 can put $15,000 to $30,000 in the promoter’s pocket.

And… you receive the credit refund, the promotor gets paid, a few years later you are audited, the credit is denied, you have to pay the full amount of the credit – plus interest and penalties – and will be unlikely to recover the payment to the firm you used for the credit.

It has become such a significant problem that the IRS listed the Employee Retention Credit as Number 1 on its list of 2023 Dirty Dozen Tax Scams.

The new IRS Commissioner, Danny Werfel, has warned:

"The aggressive marketing of these credits is deeply troubling and a major concern for the IRS.?Businesses need to think twice before filing a claim for these credits.?While the credit has provided a financial lifeline to millions of businesses, there are promoters misleading people and businesses into thinking they can claim these credits.?There are very specific guidelines around these pandemic-era credits; they are not available to just anyone.?People should remember the IRS is actively auditing and conducting criminal investigations related to these false claims. We urge honest taxpayers not to be caught up in these schemes."

Here are the issues:

In order to be eligible for ERC, a business (or group of businesses that may have to be aggregated) MUST?have:

• Sustained a full or partial suspension of their business operations in compliance with orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
• Experienced a significant decline in gross receipts during 2020 (50% decline) or a decline in gross receipts during the first three quarters of 2021 (20% decline) because of COVID-19, or
• Qualified as a recovery startup business for the third or fourth quarters of 2021. (Only recovery startup businesses are eligible for the?ERC?in the fourth quarter of 2021.)

Even after clearing these hurdles, there are other aspects that need to be taken into account: PPP loans (no double dipping on wages), Work Opportunity Tax Credits (WOTC) – wages cannot be used for qualify for multiple credits, and several others.

Also, the related tax returns have to be amended (if filed) or adjusted before filing (if not filed.)??Credits for 2020 mean tax returns for 2020 have to be amended. Credits for 2021 mean 2021 tax returns have to be amended. Wages used for the ERC cannot be included in deductible wages on the tax return, so amended returns will result in increased taxable income and additional taxes that have to be paid even if you haven’t received the ERC funds.

More Issues

To my knowledge, IRS doesn’t have a process to “approve” ERC claims when they are submitted. The refund process does take time and may be matched to make sure amended tax returns have also been filed. But an official “approval” isn’t in play as far as I know.

In most cases, the IRS has three years to audit tax returns.?In some cases of significant understatement, the audit statute can be extended to six years.

For ALL ERC claims, the audit statute is?TEN YEARS. This means that the IRS will have until around 2033 to audit an ERC claim, and if that claim is found to be invalid, that means not only will the ERC funds have to be returned to the IRS:

• There will be up to ten years of penalties;
• There will be up to ten years of interest;
• The statute of limitations to claim a refund (3 years) will have expired, so the business owners who paid taxes on the non-deductible wages to qualify for the credit will not be able to recover those taxes;
• The cost of audit representation is expensive. The cost of legal counsel if IRS CID is involved is even more expensive.

Again, I am all in favor of taking advantage of legitimate opportunities in the tax code and related regulations.??If your company may or does truly qualify for ERC, look into it.??If not, don’t fall prey to the promises of free money.

I’m not here today to offer any services or try to sell anything. Only to offer a PSA warning.

Caveat Emptor.?Let the buyer beware.

- Bill Bourbonnais, EA, MBA, CTM