Preface: The four most expensive words in the English language are, ‘This time it’s different.’ –Sir John Templeton
The Speculative Risks of the IRS Employee Retention Credit
Credit: Donald J. Sauder, CPA | CVA
The Employee Retention Credit is an IRS tax credit that gives businesses substantial relief measures for Pandemic Era financial business challenges. With the Employee Retention Credit eligibility, employers can obtain up to $26,000 of tax credit per employee. The Employee Retention Credit is also not taxable because it is a credit, making it duly appealing. Although the Employee Retention Credit applies to wages and benefits disbursed between March 2020 and December 2021, the IRS is giving businesses until April 15th, 2025 to submit their tax data for tax credit refunds. Those extra months are raising growing and valid concerns for a Pandemic Era stimulus plan that has generated a staggering amount of misleading marketing to businesses. Who qualifies? Even start-ups.
The ease of obtaining this tax credit has also resulted in some fascinating economic data. According to reports from Danielle DiMartino Booth from Quill Intelligence, who talks with clients and business owners daily, the employee retention credit data research leads to several surprising conclusions. While the Employee Retention Credit has resulted in a cottage industry of consultants marketing services to work on obtaining the $26,000 per employee credit for businesses, most companies who needed the money obtained it quickly previously.
The Employee Retention Credit is the worse kept secret in ongoing American stimulus packages. Employee Retention Credit payments were expected to peak in December of 2022 at $25.0 billion in stimulus for the month. Yet it continues. For June 2023, $29.0 billion was paid out to business owners, and for July 2023 another $33.0 billion. This is the annualized basis of more than $400.0 billion of business stimulus on an annualized basis. So, is this the reason why service spending is strong during the summer of 2023 because business owners are spreading the cheer while bilking Uncle Sam for up to 1.5% of GDP stimulus on an annualized basis?
The IRS is now pleading with the business community to not apply for the ERC unless you qualify.
Quoting Journal of Accountancy -https://www.journalofaccountancy.com/news/2023/jul/irs-commissioner-signals-new-phase-erc-compliance-work.html
The IRS and Treasury are looking at new ways to fight rampant fraud in employee retention credit (ERC) claims, including possible congressional action to move up the claim filing deadline and stricter oversight of tax preparers, IRS Commissioner Danny Werfel said Tuesday at a special roundtable session of tax professionals in Atlanta.
Werfel stated that, having cleared the backlog of valid ERC claims, the agency is intensifying compliance work and putting in place additional procedures to deal with fraud in the program.
According to Werfel, the IRS has increased audit and criminal investigation work on these claims, looking into both promoters and businesses filing dubious claims. The IRS has trained auditors to examine the claims that pose the greatest risk of fraud, and the IRS Criminal Investigation division is identifying promoters of fraudulent claims, he said.
“The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining,” Werfel said. Instead, the IRS is receiving more and more questionable claims, which the IRS is addressing by intensifying its compliance work, he said.
Businesses typically can file claims for the ERC until April 15, 2025. But those extra months are raising concerns for a credit that has generated a staggering amount of misleading marketing, Werfel stated.
Promoters making aggressive marketing claims are likely taking clients from tax professionals who are handling ERC claims correctly, Werfel said. The IRS advises businesses to work with a tax professional rather than rely on the word of promoters.
“Hard-working tax professionals who play by the rules see their clients go elsewhere, lured by false promises and wild exaggerations,” Werfel said.
Further, the chances are rising above 80% that avaricious business owners who have obtained this tax credit have an audit challenge ahead, and should be prepared to repay the entire credit. If you have obtained the employee retention credit, you may want to keep your cash reserves strong for years, because in a moment of greatest financial vulnerability, the IRS could ask for the proceeds back.