On Tuesday, July 25, 2023, IRS Commissioner Danny Werfel announced an increased concentration of effort by the IRS to fight what the IRS has labeled fraudulent Employee Retention Credit (ERC) claims.

“The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining,” Werfel told attendees at the IRS Nationwide Tax Forum in Atlanta. “Instead, we continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, the IRS continues to intensify our compliance work in this area."

Commissioner Werfel further stated, “The amount of misleading marketing around this credit is staggering, and it is creating an array of problems for tax professionals and the IRS while adding risk for businesses improperly claiming the credit. A terrible scenario is unfolding that hurts everyone involved — except the promoters.”

Taxpayers have been inundated with aggressive ERC promoters that are very persuasive. The IRS has cautioned tax preparers that fraud penalties may apply if the preparer is signing any tax return with an ERC that is found to be fraudulent.

The IRS has a complete team of auditors trained in evaluating the ERC where they believe the greatest risk of abuse lies. Separately, the Criminal Investigations Division (CID) is actively and aggressively identifying promoters of fraudulent claims.

There are clear warning signs that a promoter may not be offering a legitimate ERC:

  • Unsolicited calls
  • Claiming an easy application process
  • ERC promoter advising taxpayers they qualify for an ERC using a broad definition of “supply chain disruption”
  • Statements that the promoter or company can determine ERC eligibility within minutes
    • It is a very complicated process unless qualification is based on an overall reduction in revenue.
  • Large upfront fees to claim the credit
  • Fees based on a percentage of the refund amount of Employee Retention Credit claimed
  • ERC promoter refusing to sign the ERC return that is required to be filed by the business, exposing just the taxpayer claiming the credit to risk
  • Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group's tax situation
  • Urging businesses to submit the claim because there is nothing to lose
    • Penalties include returning the funds, plus up to 75% penalty and no avenue to recover the amount paid to the promoter

The IRS also released Office of Chief Counsel Memorandum Number AM 2023-005, which closely examines some of the questionable supply chain-based justifications for claiming the ERC. The memorandum provides additional guidance related to the definition of a "Full or Partial Suspension of Operations" due to supply chain disruption and the determination of:

  • Whether the employer satisfies the definition of eligible employer, and
  • If an eligible employer, defines the period during which wages are eligible for the ERC to be only those periods when the operations of the employer were fully or partially suspended by a government order.

This memorandum provides five scenarios that we at Delap have heard repeatedly from ERC promoters as being eligible scenarios for claiming the ERC. However, of these, only one was considered qualified by the IRS in the memorandum, and even that one was limited to the time during which there was an active government order in place.

The eligibility for the Employee Retention Credit is an extremely technical determination. We are here to assist you in determining whether you are eligible for the ERC, and, if so, we can also assist you in the calculation of the credit. We believe that if you are eligible for the ERC, you should apply and receive the credit. We cannot and will not assist in the application for, or reporting of, any ERC that is not supported by complete documentation of eligibility.

If you have questions about your eligibility for an ERC or concerns about an ERC that you have already received, please contact your Delap advisor and we will assist you in navigating through the process.