As seen in the South Florida Business Journal

P.T. Barnum said, “Nothing draws a crowd quite like a crowd.” That appears to be the case with the barrage of taxpayers claiming the Employee Retention Credit (ERC) before the April 2025 deadline passes, after which employers can no longer file amended quarterly payroll tax forms to claim the credit.

When the ERC was first enacted in March of 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), many businesses were obtaining forgivable loans under the Paycheck Protection Program (PPP). The CARES Act limited an employer’s ability to claim ERCs if they also received a PPP loan. This changed in December of 2020 with the passage of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act). The Relief Act expanded the ERC to the first two quarters of 2021, but more importantly, it enabled employers who received a PPP loan to also be eligible to claim the ERC as long as the same wages were not used for both benefits. The Relief Act also significantly enhanced the eligibility requirements and the number of eligible credits for 2021.

Background on the explosion of businesses that claimed the ERC

While the PPP loan had a simple application and easy to understand eligibility criteria, the ERC was complex and initially had less clear guidance. This left many businesses unsure of whether they qualified, and if they did, how they would determine eligibility, calculate the available credits and file the required amended payroll tax forms. While many larger enterprises and more sophisticated clients received professional guidance from their existing professional relationships, such as their existing CPA firm, many did not have an existing professional relationship to seek out such guidance. This void was quickly filled with new businesses that were formed and created an industry around the ERC. These businesses quickly appeared on the radio, television, across social media, and through a barrage of email and text blasts. Many of these promoters are charging upfront fees, taking large percentages of ERCs claimed or telling businesses they qualify for the credit without first looking at a single document.

The result has been an explosion of businesses claiming credits many months and even years later. While there are many businesses that have a legitimate basis to claim the credits as a result of comparable quarterly revenue declines or the partial suspension of business operations under a governmental order, the latter requirement was a qualitative determination that would only be challengeable under audit, since the ERC was not based on application process, as was the PPP. It was instead based on a taxpayer claiming eligibility through amended payroll tax filings.

IRS actively auditing ERC claims in response to scams

With the significant increase in the number of businesses that have claimed the ERC and the glaring presence of promoters in the marketplace, the IRS has aggressively stepped up its enforcement of eligibility through audits of businesses that have claimed the credit. They have also issued warnings to taxpayers to beware of ERC scams, which this year made the agency's list of the Dirty Dozen tax scams people should watch out for.

The determination of eligibility rests solely with the taxpayer. If the IRS ultimately determines a taxpayer was not eligible, the taxpayer will likely be out the fees paid to the promoter, oftentimes a significant sum as many of the promoters are taking a percentage fee of the credits claimed. In addition, the taxpayer will owe the IRS the amounts received for the credit, and it may be subject to interest and steep penalties.

The IRS has also reminded taxpayers any eligible wages that were used to claim the ERC cannot also be claimed as deductions on the taxpayer’s business tax return. As a result, businesses should have filed amended tax returns to reduce deductions for any credits claimed.

As we continue to move further away from the pandemic, the IRS is likely to increase its skepticism of new claims. While there may still be some time left to claim the ERC, it is more important than ever you consult with qualified professionals before pursuing the claims for the credits. For more information, contact Joshua Rader at jrader@citrincooperman.com.