What Are The Most Common ERC Scams? What To Watch Out For?

The Employee Retention Credit (ERC) is a valuable tax credit introduced by the United States government to provide financial assistance to businesses impacted by the COVID-19 pandemic. This credit serves as an incentive for businesses to retain their employees and continue operations during these challenging times. Understanding the basics of ERC is essential for both employers and employees to take advantage of this program effectively.

In this article, we will understand the most common ERC scams to watch out for.

What does the term “Employee Retention Credit (ERC)” refer to?

The Employee Retention Credit (ERC) is a special tax credit given to businesses to encourage them to retain their employees. It was created as part of the CARES Act in 2020 and has since been expanded and extended through other laws. The ERC helps employers by providing them with a refundable tax credit, which means they can receive money back from the government, to help them keep their workers on the payroll.

How does the ERC work?

The ERC operates by granting eligible employers a tax credit against the employment taxes they owe. This credit helps offset the costs associated with retaining employees and maintaining their payroll. The credit is claimed on the employer’s federal employment tax return, typically Form 941, and any excess credit can be refunded or applied to future tax liabilities.

ERC eligibility criteria: Who can claim it?

Initially, the ERC was available to businesses that experienced significant disruptions due to full or partial suspensions of operations or a significant decline in gross receipts. However, with subsequent legislation, the eligibility criteria have expanded to include more businesses.

Currently, eligible employers can be categorized into two groups:

1. Businesses significantly impacted by government orders: Employers who had their operations fully or partially suspended due to government orders related to COVID-19, regardless of their size or the extent of the suspension, are eligible to claim the Employee Retention Credit (ERC).

2. Businesses facing a substantial decrease in revenue: Employers that experienced a noteworthy decline in gross receipts (generally 20% or more when compared to the corresponding quarter in the previous year) are also eligible to claim the ERC, even if they did not face government-mandated suspensions.

How much is the ERC worth?

ERC value is determined by factors like employee count and wages paid. It initially covered up to 50% of qualified wages, including health benefits, per eligible employee, with a maximum credit of $5,000 per employee.

However, with subsequent legislation, the ERC has been enhanced and expanded. Currently, eligible employers can claim up to 70% of qualified wages, with a maximum credit of $7,000 per employee per quarter.

It’s important to note that the ERC is retroactive, meaning employers can claim the credit for qualified wages paid from March 12, 2020, to December 31, 2021. Additionally, the credit can be applied against both the employer’s share of Social Security taxes and the Railroad Retirement Act taxes.

Common ERC Scams

False ERC advisors

One of the most prevalent types of scams related to Employee Retention Credit (ERC) involves false ERC advisors. These scammers may pose as legitimate advisors or consultants, preying on the confusion and urgency surrounding the ERC program. It’s important to be aware of the following red flags:

1. Impersonation of legitimate advisors: Scammers may impersonate reputable ERC advisors or firms, using similar names, email addresses, or websites to deceive unsuspecting businesses. They may even claim to have special connections or insider information to gain credibility.

2. Requesting upfront fees: Beware of fraudulent ERC advisors who may ask for upfront fees, claiming to speed up the processing of your ERC claims or guaranteeing a larger credit amount. Legitimate advisors usually charge fees as a percentage of the credit received, without requiring any upfront payments.

3. Promising unrealistic benefits: Be cautious of advisors who make extravagant promises or guarantees regarding the ERC. The credit amount is based on specific eligibility criteria and calculations, and no advisor can guarantee a specific outcome.

Submitting incorrect ERC claims

Another common ERC scam involves the submission of incorrect claims, either intentionally or unintentionally. It’s important to avoid these pitfalls:

1. Providing false or misleading information: Scammers may knowingly provide false information on ERC claims, such as exaggerating the impact of the pandemic on their business or inflating eligible expenses. This can lead to penalties, legal consequences, and reputational damage.

2. Inflating eligible expenses: Some individuals or businesses may be tempted to artificially inflate eligible expenses to maximize their ERC credit. This can include including non-qualified wages or expenses unrelated to retaining employees. Such actions are illegal and can result in severe consequences.

3. Misrepresenting employee retention data: Scammers may manipulate or misrepresent employee retention data to claim a higher credit amount. They might falsely claim that employees were retained when, in reality, they were laid off or terminated. Accurate representation of employee retention is essential to comply with ERC requirements.

Identity theft

Identity theft is a significant concern in the realm of ERC scams, as scammers aim to exploit sensitive personal information for fraudulent purposes. Stay vigilant against the following tactics:

1. Phishing scams: Scammers may send phishing emails or text messages, posing as government agencies or legitimate entities involved in ERC processing. These messages often include links or attachments that, when clicked or opened, can lead to the theft of personal information.

2. Fake websites or emails: Be cautious of websites or emails that appear to be official ERC platforms but are fraudulent. These fake platforms are designed to collect personal and financial information from unsuspecting victims.

3. Stealing personal information for fraudulent purposes: Scammers may attempt to gather personal information by posing as ERC representatives or requesting sensitive data under false pretenses. They can use this information for identity theft, financial fraud, or other criminal activities.

Filing false claims

Filing false claims is a serious offense that can lead to legal consequences and financial penalties. Watch out for the following fraudulent practices:

1. Creating fictitious businesses or employees: Scammers may fabricate businesses or employees to claim ERC credits fraudulently. They might create fake businesses with manipulated payroll data or provide false information about non-existent employees.

2. Manipulating payroll data: Some individuals or businesses might alter or manipulate their payroll data to fraudulently claim higher ERC credits. This can involve misrepresenting wages, hours worked, or employee classification to maximize the credit amount.

3. Engaging in collusion with others: Scammers may collaborate with other individuals or businesses to file false ERC claims collectively. This collision can involve sharing manipulated data, coordinating fraudulent activities, or providing false documentation.

Remaining vigilant and cautious is crucial to protect against these common ERC.

How to Protect Yourself from ERC Scams

Safeguarding yourself from ERC scams requires a proactive approach and cautious decision-making. By implementing the following measures, you can reduce the risk of falling victim to fraudulent activities:

Do your research

1. Verify the legitimacy of advisors or service providers: Before engaging with an ERC advisor or service provider, thoroughly research their background, credentials, and reputation. Verify their credentials and check if they are registered professionals. Look for reviews, testimonials, or references from trusted sources to ensure their legitimacy.

2. Consult trusted sources for information: Rely on reputable sources of information, such as official government websites, the Internal Revenue Service (IRS), or established business associations. These sources can provide accurate and up-to-date information on the ERC program, eligibility criteria, and guidelines. Avoid relying solely on information from unfamiliar or unofficial sources.

Be careful what information you share

1. Avoid sharing sensitive data with unknown individuals or websites: Exercise caution when providing personal, financial, or sensitive business information. Do not disclose such information to unsolicited callers, emails, or unknown websites. Legitimate ERC advisors or service providers will not ask for your Social Security number, bank account details, or other sensitive data without proper safeguards and secure communication methods.

2. Use secure methods of communication and data transmission: When sharing information related to your ERC claims, ensure that you use secure communication channels. Look for encryption or secure browsing indicators, such as HTTPS in website URLs, to protect your data. Avoid sending sensitive information through unsecured email or public Wi-Fi networks, as these can be vulnerable to interception.

File your own ERC claims

1. Take ownership of the process to minimize risk: Consider filing your ERC claims directly instead of relying solely on third-party advisors. By taking ownership of the process, you can have better control over the information provided and minimize the risk of fraudulent activities by unscrupulous individuals or entities.

2. Familiarize yourself with the eligibility criteria and requirements: Educate yourself about the ERC eligibility criteria, documentation requirements, and calculation methods. This knowledge will help you identify any inconsistencies or inaccuracies in the information provided by advisors or service providers. Understanding the process will enable you to make informed decisions and detect potential fraudulent activities.

By implementing these protective measures, you can enhance your security and reduce the risk of falling victim to ERC scams. It is essential to maintain a vigilant and cautious approach throughout the ERC claims process to ensure the integrity and legitimacy of your actions.

Remember, if something appears suspicious or too good to be true, it is essential to verify the information and consult trusted sources before proceeding. Protecting yourself from scams is crucial for maintaining your financial well-being and safeguarding your personal and business information.

Conclusion

Protecting yourself from ERC scams is essential in safeguarding your financial well-being and preventing potential losses. If you suspect that you have fallen victim to an ERC scam, it’s important to take immediate action. Additionally, by sharing information and educating others, you can contribute to the prevention of such scams.

What can you do if you think you have been a victim of an ERC scam?

1. Report the incident to the appropriate authorities: If you believe you have been a victim of an ERC scam, report the incident to the relevant authorities. Contact your local law enforcement agency or state attorney general’s office to file a complaint. Provide them with all relevant details and documentation to assist in their investigation.

2. Contact the Internal Revenue Service (IRS) or relevant agencies: Inform the IRS about the scam, especially if it involves fraudulent claims or misuse of your personal information. The IRS has a dedicated team to handle tax-related identity theft and fraud cases. By notifying them promptly, you can help protect yourself and others from further harm.

How can you help to prevent others from becoming victims?

1. Share information about common ERC scams and warning signs: Raise awareness about the common ERC scams by sharing information with your friends, family, colleagues, and business networks. Discuss the warning signs, red flags, and tactics used by scammers. Encourage others to be vigilant and cautious when dealing with ERC-related matters.

2. Educate others about legitimate ERC processes and resources: Provide accurate information about the legitimate ERC processes, eligibility criteria, and requirements. Direct individuals and businesses to trusted sources, such as official government websites or reputable professional organizations, for reliable information. By promoting awareness of legitimate resources, you can help others make informed decisions and avoid falling prey to scams.

Preventing ERC scams requires collective efforts. By staying informed, sharing knowledge, and supporting one another, we can create a community that is well-prepared and resilient against fraudulent activities.

In conclusion, the Employee Retention Credit is a valuable program aimed at supporting businesses during the challenging times caused by the COVID-19 pandemic. However, it is important to be vigilant and aware of the common ERC scams that can potentially harm individuals and businesses. By taking proactive measures, reporting incidents, and educating others, we can protect ourselves and contribute to the prevention of ERC scams, fostering a safer environment for businesses and employees alike.