The IRS recently shared its 2023 “Dirty Dozen”, or its annual list of tax-related scams to be aware of this season. The first tax scam released as part of the list that has many people talking is the rise of Employee Retention Credit (ERC) schemes. The IRS warns taxpayers of organizations who are aggressively promoting the credit and making false promises of tax savings to those who are ineligible. These organizations are targeting businesses and acting as though the ERC applies to everyone when in fact there are very specific guidelines that must be met to receive the pandemic-era credit.

For starters, the ERC was designed for businesses that made an effort to recruit and retain employees during COVID-19 shutdowns. The credit is not eligible for individual taxpayers. If you hear advertisements or promotions sharing how easy it is to earn the credit and urging you to apply, it’s most likely a scam.

The IRS has allowed employers to retroactively claim the ERC. Many employers have already received the credit, but if you haven’t yet and think that your business is eligible, there may be a legitimate opportunity for you. Before you apply, here are more ERC requirements to help determine your eligibility:

  • The credit is available to businesses with operations that were either fully or partially suspended by a COVID-19 governmental order during the period the order was in force; had a significant decline in gross receipts; or qualified in the third or fourth quarters of 2021 as a “recovery startup business.”
  • The covered period for a significant decline in gross receipts begins on the first day of the quarter in which the decline occurred and ends on the last day of the quarter in which gross receipts recovered to 80% or greater compared to the same quarter in 2019.  For 2020, the decline must be 50% or greater during the 2020 calendar quarter compared to the same period in 2019.
  • For 2021, the provisions relaxed, and a business can qualify with a 20% or greater decline in gross receipts in a 2021 calendar quarter compared to the same period in 2019.  Employers also Q1 2021 qualify based on a 20% or greater decline in gross receipts using a lookback period of Q4 2020 compared to Q4 2019.
  • Additionally, a new category of eligibility was created for the ERC in 2021 quarters 3 and 4 for businesses that started after February 15, 2020 and averaged less than $1 million in average gross receipts (Recovery Startup Businesses).
  • Taxpayers that are eligible as Recovery Startup Businesses do not have to meet government shutdown or gross receipt eligibility requirements, although the credit for these taxpayers is limited to $50,000 per quarter.

As a taxpayer, navigating changing tax legislation and credits can be difficult, which is why schemes like this exist and why so many fall victim to them. To ensure your tax reporting is efficient and accurate, it’s recommended to partner with a tax professional. Tax professionals work with you to understand your unique situation and take the guesswork out of which tax benefits align with your needs while adhering to IRS guidelines.

At CDS, we partner with clients every day on their tax planning and reporting needs and are committed to providing advisory and resources that are effective and compliant. If you are interested to learn more about ERC eligibility and our other tax planning services, we’d be happy to discuss. Contact our CDS experts today at (888) 388-1040.