“For the start of the annual Dirty Dozen list of tax scams, the IRS spotlighted Employee Retention Credits following blatant attempts by promoters to con ineligible people to claim the credit.”  — IRS, March 20, 2023.”

Our previous blog about the Employee Retention Credit discussed some common misconceptions regarding the ERC. Since posting the blog, we have received countless inquiries from employers who were concerned that their third-party ERC advisor filed for the ERC on their behalf for periods in which they did not qualify. In many cases, we determined the third-party ERC advisor improperly and baselessly claimed an ERC.

This is prevalent—so much so that the IRS issued two notices (here and here) warning businesses about third-party ERC claims that could result in penalties and interest being assessed against the business (in addition to requiring the employer to pay back the credit)  and the ERC made the top of the list of the IRS’s 2023 Dirty Dozen list of tax scams.

If you are approached by or are currently working with a third-party ERC advisor, consider the following red flags before claiming the ERC:

  • Professional Status – Who are you talking to? Are you talking with a licensed attorney or a Certified Public Accountant? Was the third-party ERC advisor firm recently created solely to file ERC claims, or does the firm have an established, reputable history working with Federal tax issues?
  • Minimal Intake Questions to Determine Qualification – What process does the advisor use to determine whether a business qualifies? Did the advisor take answers provided on a simple questionnaire at face value? Did the third-party ERC advisor ask for supplemental information in response to your answers in the questionnaire? Did the third-party ERC advisor ask for documentation to substantiate you questionnaire answers?
  • Legal Citations and Support  – Has the third-party ERC advisor provided any legal citations and references to any governmental orders as the basis for its conclusion that your business qualifies for the ERC? Are you able to review the sources the third-party ERC advisor relied upon to ensure you agree with the recommendation to claim the ERC?
  • Claiming ERC for Q2 and Q3 2021 under “Partial Suspension” Test – Most governmental orders that would result in a suspension of operations ended prior to Q2 of 2021. Does the third-party ERC advisor claim that you qualify for the credit in Q2 and Q3 of 2021? If so, has the third-party ERC advisor provided you with a specific citation to and copy of the government order that caused the purported partial suspension?
  • Audit Representation – Is the third-party ERC advisor willing to assist your company if the IRS audits ERC is audited by the IRS? Or, does the third-party ERC advisor specifically disclaim in its service contract with you any requirement to do so?
  • Hold Harmless/Indemnification – Does the third-party ERC advisor require that YOU hold the third-party ERC advisor harmless or that YOU indemnify the third-party ERC advisor if your ERC is audited? Are YOU on the hook for any liability to the third-party ERC advisor that solicited you if the ERC is audited by the IRS?

This list of red flags is not exhaustive and is likely to expand as our ERC Team is asked to provide secondary opinions on third-party ERC advisors’ work product. If you have engaged a third-party ERC advisor and see these red flags, contact us before claiming the ERC.