In response to the economic challenges posed by the COVID-19 pandemic, the U.S. government introduced several relief measures to support struggling businesses and individuals. One such lifeline was the Employee Retention Credit (ERC). However, this well-intentioned program unwittingly spawned a perilous phenomenon known as ERC mills.
ERC Mills: The Dark Side of Relief
ERC mills, be they individuals or businesses, exploit the ERC program by helping others in filing multiple, erroneous, or fraudulent claims. Frequently, they expedite the process, sidestepping verification and compliance checks. They charge hefty fees while making promises of substantial tax refunds.
ERC mills often take shortcuts, causing businesses to file claims they don’t actually qualify for. This not only puts the legitimacy of the claim at risk but can also lead to hefty penalties down the road.
The IRS is keeping a close eye on ERC claims due to the rise in fraudulent activity. In fact, their concern has risen to the point that last week they put a pause on accepting any new ERC applications. The pause will allow them to devote resources to closer examination of the approximately 600,000 claims that have been filed within the last few months but not yet processed.
Consequences of Filing a False ERC Claim
Filing a fraudulent ERC claim, whether intentional or not, has serious consequences. Ignorance offers no immunity from these repercussions. ERC mills typically shield themselves of responsibility, asserting in their contracts that they merely complete forms based on provided documentation, even if they never requested or required such documentation.
Legal Consequences: Filing a false claim is a federal offense, potentially leading to criminal charges, fines, and possibly jail time. The business is liable for every return and form filed with the IRS.
Paying it Back and Penalties: If the IRS detects an incorrect ERC claim, your business must repay the funds with interest. This includes the amounts the business paid to the ERC mill. Penalties may also be imposed.
Loss of Tax Benefits: In addition to repaying ERC funds, your business may lose eligibility for other tax credits and deductions, increasing your overall tax bill.
Audit Exposure: A phony claim can trigger an IRS audit, a stressful, expensive, and intrusive process. Even if your intentions were honest, you might face an audit due to ERC mill mistakes.
The Employee Retention Credit was meant to provide financial relief during tough times. However, the risks of ERC Mills and deceptive marketing tactics warrant businesses to exercise caution, meeting all eligibility criteria before pursuing ERC credits. The fallout from engaging with ERC mills or filing fake claims can be financially and legally devastating. To navigate these challenging times without falling into the fraud trap, partner with a reputable tax professional to evaluate whether you qualify for the credit and prepare and file your application.
Treu Accounting is a results-driven small business accounting expert, delivering services designed to build resilience and exceed goals. Treu Accounting tailors our services to fit your unique needs. We provide opportunities for an ongoing conversation from the initial consultation to understand you and your business to the customized proposal, to ensure you get what you need.