Beware of Employee Retention Credit scams

Beware of Employee Retention Credit scams

The IRS continues to see third parties aggressively promoting Employee Retention Credit (ERC) schemes. In News Release IR-2023-105, the IRS renewed an alert for businesses and tax exempt groups to watch out for warning signs of aggressive Employee Retention Credit marketing.

These promoters may lie about eligibility requirements. In addition, taxpayers using these companies could be at risk of someone using the credit as a ploy to steal their identity or take a cut of the taxpayer’s improperly claimed credit.

ERC is important pandemic-era credit and valuable if claimed properly, but could result in repayment and substantial penalties and interest if not. The IRS has trained auditors examining ERC claims posing the greatest risk. The IRS Criminal Investigation division is working to identify fraud and promoters of fraudulent claims. Illegitimate claims slow down processing of the credit for everyone.

The IRS also reminds businesses, tax-exempt groups, and others about simple steps to take to protect themselves from making an improper ERC. 

• Work with a trusted tax professional; don’t rely on the advice of those soliciting these credits.
• Don’t apply unless you believe you are legitimately qualified for this credit. Details about the credit are available at IRS.gov | Employee Retention Credit.

Reporting ERC fraud:

Employers can report illegal tax-related ERC claims and activities by submitting a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers (PDF), and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations. The fax telephone number and mailing address are on the form. 

Payers may receive notices CP2100 and 2100A if they filed an information return with errors

When banks, credit unions, businesses and other payers file information returns with data that doesn’t match IRS records, the IRS sends them a CP2100 or CP2100A notice. The notices tell payers that the information returns they submitted have a missing or incorrect Taxpayer Identification Number (TIN), name or both. These notices are sent twice a year in September and October and again in April.

Each notice has a list of payees with the issues. Payers need to compare the accounts on the notice with their account records and correct or update their records, if necessary. Payees may also need to correct their backup withholding on payments made to payees.

The IRS sends notices for errors most frequently found on these forms:

• Form 1099-B, Proceeds from Broker and Barter Exchange Transactions
• Form 1099-DIV, Dividends and Distributions
• Form 1099-G, Certain Government Payments
• Form 1099-INT, Interest Income
• Form 1099-K, Payment Card and Third-Party Network Transactions
• Form 1099-MISC, Miscellaneous Information
• Form 1099-NEC, Nonemployee Compensation
• Form 1099-OID, Original Issue Discount
• Form 1099-PATR, Taxable Distributions Received from Cooperatives
• Form W-2G, Certain Gambling Winnings

Payments subject to backup withholding

CP2100 and CP2100A notices also tell payers that they may be required to backup withhold tax payments. When payments are reported on the Form 1099 series and Form W-2G information returns, payments may be subject to backup withholding if:

• The payee doesn’t:
  • Give their TIN to the payer in the required manner
  • Certify that they aren’t subject to backup withholding for underreporting interest and dividends
• The IRS tells the payer:
  • The payee gave an incorrect TIN and didn’t certify their TIN as required
  • They must begin backup withholding because the payee didn’t report all their interest and dividends on their tax return

Payers are responsible for any amount they fail to backup withhold and the penalties that may apply.