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January 12, 2023

Too Good To Be True? Be Wary of Third-Party ERC Mills


During the height of the COVID-19 pandemic, the Employee Retention Credit (ERC) helped employees keep their staff members on payroll. While this tax credit is no longer available, eligible employers who have yet to claim it may be able to do so by filing amended payroll returns for 2020 and 2021. 

However, the IRS warns against third parties advising non-eligible employers to claim the ERC. 

ERC 101

The ERC is a refundable tax credit designed specifically for businesses that: 

  • Continued to pay employees while being closed due to the COVID-19 pandemic, or 
  • Had significant declines in gross receipts between March 13, 2020, and September 30, 2021 (or, for certain startup businesses, December 31, 2021) 

Eligible employers who did not claim the ERC on an original tax return may still be able to claim it on an amended return. 

Eligible businesses must have fully or partially suspended operations due to government orders limiting commerce, travel, or group meetings due to the pandemic during 2020 or the first three quarters of 2021. Those who qualified as a recovery startup business during the third or fourth quarters of 2021 may also be eligible. 

Note that for any quarter, eligible employers cannot claim the ERC on wages that were: 

  • Reported as payroll costs in obtaining Paycheck Protection Program (PPP) loan forgiveness 
  • Used to claim certain other tax credits 

The problem with third-party “ERC mills” 

Some third-party “ERC mills” are sending notices via email, postal mail, and voicemail—and even advertising on television—promising businesses that they can help them receive a refund, despite not knowing anything about the employers’ unique circumstances. 

When businesses respond, these third parties claim many improper write-offs relating to the tax credit, such as taxpayer eligibility and computation. These third parties often charge large fees, whether upfront or contingent on a refund, without informing taxpayers that wage deductions claimed on federal income tax returns must deduct the amount of the credit. 

Getting the facts straight

If a business filed an income tax return that deducted qualified wages prior to filing an employment tax return claiming the ERC, they should file an amended return correcting any overstated wage deductions. 

The IRS encourages businesses to be wary of advertisements and offerings that seem too good to be true. Regardless of the third parties involved, taxpayers are always held responsible for any information reported on their tax returns. By improperly claiming the ERC, you may be required to repay not only the credit, but also any penalty fees and interest.

Wondering if you can still claim the ERC? Contact a knowledgeable tax professional

If you’re an employer who didn’t previously claim the ERC and believe you may be eligible, Smolin’s tax advisors can help you determine how to proceed. Contact us today. 

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