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Another tax scam: beware of improperly filing the Employee Retention Credit

The IRS is warning businesses about the risks of falling victim to this scam

Photo (c) Designer 491 - Getty Images
There has been no shortage of warnings related to tax scams in the last few months, and the Internal Revenue Service (IRS) has another one – specifically for businesses. 

This scam relates to the Employee Retention Credit (ERC), which was geared towards business owners during the pandemic. For the last few years, business owners who either lost a significant amount of revenue or were paying their employees while closed during the COVID-19 pandemic were eligible to claim this credit on their taxes. 

However, scammers are sending phishing emails and posting on social media encouraging taxpayers to claim this credit even when they’re not eligible to do so anymore. 

“While this is a legitimate credit that has provided a financial lifeline to millions of businesses, there continues to be promoters who aggressively mislead people and businesses into thinking they can claim these credits,” said Doug O’Donnell, acting IRS commissioner. 

“Anyone who is considering claiming this credit needs to carefully review the guidelines. If the tax professional they’re using raises questions about the accuracy of the Employee Retention Credit claim, people should listen to their advice. The IRS is actively auditing and conducting criminal investigations related to these false claims. People need to think twice before claiming this,” he said. 

Who is eligible for the ERC?

The IRS outlines three primary factors for taxpayers to qualify for the ERC: 

  • Qualify as a recovery startup business for the third and fourth quarters of 2021

  • Forced closure (either full or partial) due to restrictions from COVID-19 during 2020 or the first three quarters of 2021

  • Experienced a significant reduction in revenue in 2020 or the first three quarters of 2021

This is important to keep in mind when thinking about how scammers are targeting business owners this tax season. 

What does the scam look like? 

The IRS explained that scammers are pushing business owners to claim the ERC on their 2022 taxes – even if they don’t qualify. The draw is that doing so will help secure a bigger tax refund. 

While falsely claiming the credit can put taxpayers at risk of penalties, fines, or criminal investigations, many of these scammers are also either asking for incredibly large fees or wait until they see the taxpayer’s refund before they ask for a fee – just for calculating their credit. 

This is the IRS’ third such warning about this scam to taxpayers. While the promise of more money back on taxes sounds great, getting a bigger refund under false pretenses comes with a significant amount of risk. 

For those who may have incorrectly claimed the ERC, the IRS encourages taxpayers to file an amended return with the correct figures. 

The agency is also asking taxpayers to do their part and report any instances of these scams as soon as they encounter them. Phishing activity can be reported to phishing@irs.gov, or to the Treasury Inspector General for Tax Administration at 1-800-366-4484. 

Taxpayers can also complete Form 14242 (Report Suspected Abusive Tax Promotions or Preparers) and mail it to the Internal Revenue Service Lead Distribution Center, Stop MS 5040, 24000 Avila Road, Laguna Niguel, California, 92677. 

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