One of the IRS’s primary concerns was that ERC companies were improperly qualifying or over-qualifying small businesses.
The IRS website stated that to be eligible for credits, employers must have payroll employees between March 12, 2020, and Dec. 31, 2021, and experienced a significant decline in gross receipts during the pandemic.
But that’s not all.
Another essential requirement is that a business’s decreasing income is directly related to government mandates or orders, a distinction often overlooked. For instance, a small business that sells event tickets experiencing a revenue downtown after government mandates had been lifted would not qualify for the ERC, Sardar said.
“You can have all sorts of losses, but unless it’s tied to a government action that caused it, you don’t qualify for the ERC,” Sardar said, “[This is] where a lot of the mistakes happened, some of which were just innocent mistakes and some of which were fraudulent mistakes.”
Businesses with no W-2 employees, no significant decline in gross receipts, and no more substantiated nominal impact on the business were other common reasons that clients don’t qualify, according to alliantgroup, a tax advisory firm specializing in tax credits.
“We’ve processed thousands of [ERC returns] and helped taxpayers of different sizes get the money there,” Everson said. “We have also screened out thousands and told taxpayers they don’t qualify.”
One ERC-filing company said while it wants to help small business owners who otherwise don’t have the resources to apply for the credit, it understands the concerns the IRS has.
“While I can’t speak to the process of others in the space, the IRS is right to address those that have not taken a data-driven and compliant approach. I am disappointed that there are companies using the complexity of this tax incentive to prey on deserving small businesses,” Howard Makler, CEO of Innovation Refunds, told Yahoo Finance.
“As a compliant player in this space, we are mirroring the IRS moratorium.”
Makler also detailed how his company uses tax attorneys to analyze documents from small businesses when deciding eligibility. A tax lawyer or CPA signs off on all applications. The company also defends its work in case of IRS questioning. It also charges a 25% contingency fee, a practice the IRS has warned taxpayers about on its website, though the company stated that clients only pay when a refund is received.
In light of the IRS announcement, the company has stopped taking on new clients and is preparing for an anticipated flood of audits from the tax agency.
“We haven’t seen a large number of audits yet. Just too early,” Makler said. “They are coming. We all know they’re coming.”
While the IRS has directed its concerns toward the ERC mills, small business owners that relied on their services unfortunately will be caught up in the middle. For most, who innocently trusted these ERC mills, they will need to return any amounts for the credit they didn’t qualify for.
The IRS is creating a settlement program for repayment for any small business owners who got “an improper ERC payment.” The agency plans to release more details on that program soon.
“So [the IRS] is not doing anything to punish you,” Sardar said. “It is just saying you were never entitled to it, so you should give it back and that’s consistent with how the tax system always works.”
But if the small business owner agreed to the ERC fraud, the IRS could prosecute them as well.
“That’s a judgment that the IRS will make with the US Attorney in the jurisdiction they are looking at,” Everson said. “It would have to be a pretty blatant case of fraud to go after the taxpayers.”