The IRS Warns Businesses About Claiming the Employee Retention Credit

Important information just in time for the Form 941 Q1 deadline!

With the first quarter 941 deadline coming up on March 1, 2023, businesses planning to claim the ERC credit or considering claiming this credit with the help of a third-party provider must be aware of the risks. 

The IRS continues to issue warnings about the risks of filing the Employee Retention Credit incorrectly. False claims are becoming more common and problematic for business owners and the IRS. 

As a business owner, here is what you need to know about the Employee Retention Credit, how to properly claim it, and when to avoid third-party providers offering an “easy solution”.

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) was created in response to the COVID-19 pandemic. This credit was introduced in the CARES Act (2020) to encourage employers to keep their employees on the payroll despite the economic downturn. 

This refundable tax credit was available from March 13, 2020, until December 31, 2021. While the credit is no longer available, employers can still claim the credit if they were eligible during that time and didn’t claim the credit.

Who is Eligible for Claiming the ERC?

The IRS has particular criteria for ERC eligibility. According to the IRS, the business must meet at least one of these criteria to be eligible for the ERC.

  • Businesses that paid employees while they were shut down due to the COVID pandemic.
  • Businesses that qualified as a recovery startup businesses for the third or fourth quarters of 2021.
  • OR businesses that had significant decreases in gross receipts between March 13, 2020, to Dec. 31, 2021.

How can Eligible Employers Claim the ERC?

Eligible employers can claim the ERC for past quarters on their original or amended employment tax returns. For example, for the majority of employers, this would be their quarterly Form 941. The amended return would be Form 941-X.

Employers can claim back credits using Form 941, and Form 941-X, but this won’t always be the case. There are cut-off dates for when businesses can claim back credits.

  • For the 2020 tax year, the deadline for the ERC is April 15, 2024. This deadline applies to all 941 filings in the second, third, and fourth quarters of 2020.
  • For the 2021 tax year, the deadline is April 15, 2025. This deadline applies to all four quarters because the ERC was available for all four quarters of 2021.

What is Form 941? 

 Form 941 is a quarterly payroll form that employers are required to file with the IRS to report the amounts of Medicare, social security, and income taxes that they withheld from the employee’s paychecks. 

To determine the amount an employer can claim for the ERC, they can use the 941 Worksheets provided by the IRS for the first quarter of 2023.

Fraudulent ERC Activity: What to Watch Out for

While the ERC is a great benefit for eligible businesses, the IRS has reported a major increase in fraudulent activity surrounding it. One of the major issues is third parties that offer to help businesses claim the ERC. 

While there are some requitable service providers doing this, many are scams. They charge large sums upfront and are claiming the ERC for businesses that aren’t actually eligible, or they are claiming the credit improperly. 

This can cause major issues down the road for businesses, they may be fined and required to repay the credit if they aren’t actually eligible for the credit.

If you have claimed a refund for the ERC, you should only discuss this information with the IRS. Even IRS e-file providers like TaxBandits won’t have access to this IRS information. You should always call the IRS at 1-800-829-4933 to check on the status of your refund.

Tips For Avoiding ERC Scams 

It is crucial that businesses keep in mind that they alone are responsible for the returns they file and the information that is provided to the IRS. Before providing any sensitive information to a third party or a tax professional, they should be thoroughly vetted. 

While Tax professionals provide an excellent resource for businesses, some may be dishonest or fraudulent. It is always important to do your due diligence before providing them with sensitive information. 

The IRS offers a free resource to help businesses and individuals search for qualified tax professionals with the necessary credentials in their area. Click here to check that out. 

As a business owner, you can help others by reporting potential schemes that you experience to the IRS. This can be done here with the Treasury Inspector General.

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