Rodefer Moss | Certified Public Accountants and Business Advisors

IRS Warns Employers About Third-Party Employee Retention Credit Vendors

Written by RMTaxTeam | November 17, 2022 at 5:00 AM

Employers, be on your guard against great-sounding offers from third-party vendors pitching plans to help you claim the Employee Retention Credit (ERC). The IRS is putting out a warning that follows a time-honored truth: if it seems too good to be true, it probably is, and you should go the other way.

The IRS’s red flag concerns employers about a type of “can’t pass this up” scheme pushed by some third-party vendors who say they can advise employers on how to claim the credit: the approach is that they know things you don’t, and if you pay them now, you’ll later get more ERC money refunded back from the IRS.

 The ERC was created as a response to help employers weather the economic storm Covid-19 wrought on the country. The IRS explains the ERC problem as “Some third parties are taking improper positions related to taxpayers’ eligibility for and computation of the benefit.” In short, vendors may be overly aggressive in their interpretation of an employer’s eligibility for the ERC. Or they really may not know what they’re doing. As a result, bad numbers get submitted to the IRS to justify the claim.

What’s in it for the vendors? Many want up-front fees or a percentage of the claimed amounts. After paying, the employer is still responsible if anything is wrong with the claim submission and if taxes, penalties and interest are owed. Another IRS concern is they “may not inform taxpayers that wage deductions claimed on the business' federal income tax return must be reduced by the amount of the credit.”

Here is straight-from-the-IRS guidance on ERC claims eligibility.

“To be eligible for the ERC, employers must have:

The IRS has been dealing with ERC-related difficulties for a while; in April, the agency announced relief for some taxpayers and tax preparers of penalties assessed when more tax was owed because ERC refunds hadn’t yet been received because the qualified wage deduction was reduced by the amount of a retroactively claimed ERC. The relief stems from an ongoing IRS backlog of unprocessed returns, resulting in employers being hit with penalties though their refund enabling them to pay the taxes was trying to find its way through the IRS bottleneck.

This is an example of kinks still being worked out of the ERC. Application of the ERC to a business is not simple, and navigating such tax laws is challenging enough without introducing into the mix a third-party vendor whose main interest may be only to take possession of your money, potentially leaving you with an expensive IRS problem.

Take the IRS’s advice. Be wary of solicitations promising, or even suggesting, that if you just use a certain vendor there’s a pot of ERC gold waiting for you. Work with established, reputable, licensed accountants.

It’ll be to your credit, tax and otherwise.