Employee Retention Credit (ERC) Audit Defense Task Force

In recent months, the Internal Revenue Service (IRS) has publicly acknowledged a surge in questionable claims related to the Employee Retention Credit (ERC) program. This development has prompted the IRS to intensify audit and criminal investigation efforts regarding these claims. However, a vast number of claims have been orchestrated by unscrupulous promoters known as “ERC Mills,” which target small businesses by promising them substantial amounts of money through the program, even if those businesses are not eligible for the benefits. On October 19, the IRS announced a formal withdrawal process for certain ERC claims, which is discussed in more detail below. 

Understanding ERC Mills

ERC Mills are promoter entities that aggressively target small businesses, promising significant financial benefits—such as $26,000 per employee—through the ERC program. Enticed by the prospect of easy money (from a seemingly legitimate request), small businesses are convinced to file claims with minimal due diligence. Typically, ERC Mills lack expertise and qualifications held by accountants, CPAs, or tax attorneys, and prey on unsuspecting business owners who may not be aware of the ERC program’s complexities and requirements. Victims are charged exorbitant fees, with no refund options if claims are denied or audited. Despite often being told that the process is “risk-free,” the victims may face significant penalties from the IRS due to improper filings.

How to Identify ERC Scams

Common tactics used by scams include:

• Guaranteed eligibility or determination within a few minutes
• Application processing with minimal amounts of vetting
• Marketing headlines that include phrases such as “risk-free” or “nothing to lose”
• Large fees based on the ERC refund amount
• Large fees paid upfront to claim the credit

IRS Actions Against Fraudulent Claims

The IRS has made it clear that the number of questionable claims is significant, leading to government concerns about scams and fraudulent payments. The recently confirmed Commissioner of Internal Revenue halted processing of new ERC claims  to increase safeguards and prevent further abuse of the program. Existing claims will still be processed but will be held to much higher levels of scrutiny. In addition, the agency has referred thousands of ERC cases for audit and is conducting extensive compliance reviews of potentially all ERC claims from the inception of the program. 

Consequences of Improper ERC Refunds

ERC claims that are deemed as mistaken or fraudulent may face various consequences, including paying back the credit with interest and penalties, as well as potential criminal prosecution. However, the IRS has acknowledged that many small businesses did not intend to file an illegitimate claim and were genuinely pressured or scammed by aggressive promoters. Thus, if you filed an ERC claim through the assistance of a third party, or if you are currently working on an ERC claim with the intent to file one, it is important to get ahead of any potential issues.  

ERC Claim Withdrawal

The IRS has created a program that allows employers to withdraw an ERC claim if they made the claim on an amended return and either (a) the IRS has not made a payment on the ERC claim or (b) if the payment has been made, the check has not been deposited.  In this case, the IRS will waive all interest and penalties, and the business and owner will not be subject to further liability.  It is our expectation that this is the first step in a rollout of new programs to enable businesses that received ERC funds to return the funds and mitigate or eliminate liability.

How Our Law Firm Can Assist

At Falcon Rappaport & Berkman, our team assists clients on matters including:

• Negotiating with the IRS upon audit of an ERC claim, including a defense of the claim itself and arguing against the application of penalties
• Reviewing ERC claims not yet audited and advising about actions to take in advance of a potential audit
• Analyzing agreements with ERC Mills and advising about pursuing remedies against them
• Double-checking the assessments from ERC Mills about the eligibility of a potential claim
• Evaluating whether your business has alternative avenues for tax savings and other advantages, such as qualified plans or other tax incentives
• Advising other service professionals, such as accountants, regarding their ethical responsibilities, legal liabilities, and defense preparations in connection with ERC claims
• Enter into formal IRS programs to withdraw ERC claims to mitigate or eliminate liability

If you need assistance on matters related to ERC scams or audits, please don’t hesitate to reach out to our Taxation Practice Group by phone at (516) 599-0888, or email erc@frblaw.com.