Listen to this articleAfter millions of businesses and nonprofits scored billions of dollars in tax credits from a federal employee retention initiative born out of the pandemic, the Internal Revenue Service has paused the program to sniff out suspected fraud.
Now accounting firms are cautioning their Long Island clients to be wary of unscrupulous promoters of the program that have been promising windfalls but may be getting businesses into hot water.
Known as the Employment Retention Credit (ERC), the IRS program was aimed at assisting businesses to pay employees if they lost revenue or had to suspend or partially curtail their operations during the 18-month height of the COVID-19 pandemic. Though the eligibility period ended on Oct. 1, 2021, businesses could still apply for the ERC refunds retroactively, with claims from 2020 set to expire at the end of April 2024 and claims from 2021 expiring in April 2025.
However, the tax credit program has become a vehicle for promoters and scammers offering to assist businesses to apply for the refunds in exchange for a fee, without determining if those businesses actually qualify for the money. So, after receiving some 3.6 million applications and doling out billions of dollars, the IRS halted the ERC program last month until at least the beginning of next year to better scrutinize applicants and increase audits of those who received refunds.
Here on Long Island, accounting firms have been reaching out to their business and nonprofit clients to warn them about the pitfalls of using promoters and to help them apply for the ERC program if they truly qualify.
“The IRS has been very concerned about the prevalence of fraud within this area to the tune of billions of dollars,” says Greg Wozniak, a partner at Marcum LLP. “They are very concerned about what’s been happening in the marketplace with radio and TV ads from companies that charge contingency fees for claims, so that the more money you get, the more money they get as a percentage of the claim.”
Wozniak says the IRS is woefully backlogged on processing ERC claims and are estimated to be anywhere from 500,000 to 800,000 claims behind.
“The concern from the IRS is that the claims are from these promoters and mills doing it too aggressively or fraudulently with companies that really don’t understand the laws or what they’re getting themselves into,” he said.
The federal government suspects that as much as $200 billion or more has been stolen from similar programs instituted during the pandemic, including Payroll Protection Program loans from the Small Business Administration and COVID-19 Economic Injury Disaster loans, according to published reports.
Ken Cerini, managing partner of Bohemia-based accounting firm Cerini & Associates, has been advising clients that the ERC presents a lot of opportunity to obtain money, but they have to be careful and do it the right way.
“It’s under a lot of scrutiny at this point in time,” Cerini said. “The IRS is really looking at this program because there’s been a large amount of fraud that has taken place, where you have ERC mills that are out there advertising heavily and taking advantage of the general public in terms of telling them they’re entitled to credits when they’re not necessarily entitled to credits.”
Rob Gilman, partner and leader of the Real Estate Services practice at Anchin in Uniondale, said businesses need to be wary when contacted by ERC promoters bearing promises.
“Many of our clients had already filed for this prior, but a lot of them are getting these phone calls that you qualify and say you can get back $400,000 or whatever the number is,” Gilman said. “My first comment to them is always ‘just because they’re telling you that you’re getting this money does not mean that you qualify.’”
He added that even though businesses kept their employees through the pandemic period, they won’t necessarily qualify for the ERC refunds; revenue reductions will still be required.
“We’re meeting with our clients to see if they qualify, and it’s not just a five-minute conversation,” Gilman said. “We’re reviewing revenue figures from the past couple of years. We’re trying to determine if their business does qualify for some of these government shutdowns. Sometimes they’ll qualify for all the periods, and sometimes they’ll qualify for partial periods. It’s not all or nothing. So even if you qualify for one period, it’s still worth applying for these refunds.”
Wozniak says the amount of ERC refunds that some Marcum clients have already received ranges from $50,000 to more than $5 million for legitimate claims within IRS guidelines.
“Our guidance is do it the right way,” he said. “ERC is still there. We’re telling our clients to still file the claim, but file it legitimately, and just be careful.”
The two necessary criteria to qualify for the refunds include proving a significant reduction in revenue, or that business operations had to be suspended due to government-mandated shutdowns.
“You have to be super careful on these things, especially if you don’t meet either of the two criteria,” Cerini said. “If you haven’t seen a significant decline in your revenue that meets the criteria under the program, or you’re applying for the credit under the regulations that allow you to obtain the credit if you have a decline in business operations due to a government mandated shutdown, that’s when you have to be really careful and make sure you go through and document what that government shutdown is, what the timeframe is, and that you can link it back to your drop in operations.”
Most importantly, the accountants advise not relying on fly-by-night firms promising to deliver ERC money.
“Have a professional, not just a consultant, but an accountant that truly knows the rules and can walk you through if you actually do qualify,” Gilman says. “If you certify that you qualify and you don’t, that could be a problem.”
Cerini agrees with that sentiment.
“Everybody was saying ‘free money, free money,’” he said. “But it’s not free money. It’s there for organizations and companies that need it.”
