ERC Audits On the Rise: Are You On the IRS’s Radar?

ERC Update 10.27.23

You know when you were a kid, and you did something bad and your parents called you over and gave you a chance to confess before they busted you? The punishment either went away or was a lot lighter because you did the right thing.

The IRS has just announced the “small business taxpayer” equivalent of your parents’ “come forward now to avoid getting in trouble later” strategy regarding fraudulent ERC claims.

Essentially, the IRS has released a process to withdraw an ERC claim that’s been filed, but not paid

However, if you’ve paid on your previously-filed claim and believe it was erroneous (or was potentially erroneous), you’d need to file an amendment. 

If you’re anything like most small business owners we work with, you’ve got better things to do than scroll Google for news about the IRS and what it’s been up to lately.

So, in case you missed it, our federal taxing authority made big headlines last month when they completely halted new Employee Retention Credit (ERC) processing because so many fraudulent claims have been filed – and announced that fraudulent ERC claims are on their “dirty dozen” list of tax scams.

As of July 31, 2023, IRS Criminal Investigation has initiated 252 investigations involving over $2.8 billion of potentially fraudulent ERC claims. Of those, fifteen have resulted in federal charges with six convictions and jail time. In other words, they want more than just a monetary payback.

ERC Had Good Intentions, But….

Let’s take a quick time machine back to 2020, the year no one wants to remember. In March, Congress passed the CARES Act, which included a provision via the ERC to help businesses that had been shut down due to Coronavirus regulations retain their employees.

Unfortunately, during that dizzying time, the IRS didn’t have much in the way of guidance for who qualified and how.

Even when the IRS issued additional guidance, it was very much subject to interpretation. This spawned a bunch of “ERC Credit Mills” — aka pop-up shops with aggressive marketing tactics promising an easy application process, large credit claim amounts, and either large upfront fees or fees based on a percentage of the credit.

We’ve written about these ERC credit mills before to warn business owners not to fall for these marketing tactics. When the IRS notice comes, those providers will be long gone and you’ll be left with the fallout of a mess you don’t even understand.

But don’t worry; hardly anyone was clear on ERC when it first came out, and while guidelines have been issued, even the IRS admits that the ERC is a “complex credit.”

If You Filed an ERC

Given the current situation, you’re either sure you qualified, or you’re not sure. If you worked with your regular, trusted accountant or tax professional to determine your qualification for the ERC, you’re probably safe to adopt a “wait and see” position as the IRS works through its audits.

But if you’re not sure you qualified properly, it’s time to take swift action. If it turns out you filed a larger claim than your business was properly qualified for, it’s much better to proactively contact the IRS and take voluntary steps to resolve the issue.

The alternative? Wait for a notice and subsequent IRS examination, which will certainly include not just paying back the credit, but also penalties.

The Bottom Line

If it sounds too good to be true, it probably is. Beware the ERC credit mills, and consider re-examining your ERC qualification with a tax resolution professional.

You shouldn’t hesitate to take a legitimate credit like ERC, which was a much-needed boost for small business owners during COVID. But do it with the help of an experienced tax advisor who applies the credit to your specific situation.

If you claimed an Employee Retention Credit and have questions about whether you’re in compliance–or if you’ve already received an audit notice–we can help you investigate your options. Contact us at redbikeadvisors.com.

Gretchen Roberts

Gretchen Roberts

Gretchen Roberts is CEO of Red Bike Advisors LLC. As a business owner herself, Gretchen has a deep understanding of the problems, questions, and financial pain points that business owners experience on a daily basis, and how strategic financial and tax planning is the key to "breakaway" business growth and success.
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