IRS Warns About Employee Tax Credit Abuse

This article was originally published in Family Business on December 7, 2023.

What family offices and closely held businesses should do now 

The Employee Retention Credit (ERC) — part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, which went into effect on March 27, 2020 — aimed to encourage employers to keep workers on payrolls during the COVID-19 pandemic. For closely held businesses, this was crucial for staying afloat during tough times. The ERC offered a refundable tax credit of up to $5,000 per employee in 2020 and $7,000 per employee per quarter for the first three quarters of 2021.

The significant impact of the ERC led to an industry of third-party “advisers” and ERC “specialists.” While many taxpayers had their accountant calculate the ERC as needed, those who did not qualify were inundated with ads promising easy money and assistance in claiming the credit. It’s startling for some family offices to discover that after filing returns without the credit, a family member might have independently pursued such offers, resulting in incorrect claims.

The IRS has repeatedly warned against ERC scams that mislead on eligibility and charge hefty fees for credit claims, leaving taxpayers with substantial tax issues. Scammers profit, leaving you with the repayment burden, interest and penalties.

The pandemic’s isolation led overwhelmed small accounting teams to online resources to keep up with aid programs, making them susceptible to misinformation. Mistakes in claiming the ERC, whether accidental or due to poor advice, are now under scrutiny.

The IRS has noted an uptick in improper ERC claims, prompting a series of taxpayer warnings. IRS Commissioner Danny Werfel emphasized that strict guidelines govern these credits, which are not available to everyone. The IRS is actively auditing and investigating false claims, urging taxpayers to avoid such schemes.

The challenge is distinguishing honest businesses from wrongdoers. Even if your family office or business rightfully claimed the credit, an audit could still occur. Responsibility for the information on tax returns rests with the taxpayer, not the preparer, and the IRS imposes severe penalties for incorrect reporting.

Collections efforts focus on the taxpayer, not advisers, who may face their own legal issues. The business or the family must foot the bill for defending audits and mitigating criminal investigations. Correcting false claims early is vital, as scammers often disclaim responsibility and may not be easily located.

For family offices, managing complex structures with multiple returns can be daunting. With the IRS given more time to audit than taxpayers have to amend returns, disallowed credits could lead to repaying the credit plus interest and penalties, without the possibility of reclaiming wage deductions.

The rise in criminal actions due to abuse has led the IRS to seek whistleblowers and take enforcement seriously. Families with internal conflicts or severed relationships should review any ERC claims and confirm no unauthorized filings have been made.

Closely held businesses and family offices that claimed the ERC should conduct a self-audit. If you find the credit was claimed incorrectly, address the issue proactively. Engage a new, reputable expert if necessary, and if you’re at risk of criminal exposure, consider options to resolve it before the IRS takes action.

It’s prudent to navigate the complexities of improper ERC claims properly to confirm that both credit and deduction corrections are handled, potentially leading to an agreement with the IRS to forestall further issues.