4 signs of ERC fraud–and how to avoid them

Although the Employee Retention Credit (ERC) can certainly be very lucrative for clients, many ERC professionals are claiming enormous ERC amounts, however possible to increase the amount of their fees, whether the company legitimately qualifies for it. This approach has resulted in many ERC fraud investigations by the IRS, with many more on the way.

Working with such ERC fraudsters can impact our hard-earned reputation and credibility with clients who respect our opinion because they trust we’re working in their best interest. To know how to spot an ERC fraudster before partnering with them, here are four top signs of an ERC scam.

Sign 1: There is an emphasis on selling clients—not educating them

ERC providers get a quick win from taxpayers by flashing their largest ERC client amounts, but fail to help clients understand how they qualified for the ERC. This vagueness and ambiguity hide these consultants’ ignorance and questionable practices from clients, and leaves them woefully unprepared to explain or justify their ERC eligibility in the IRS audit.

At MBS Accountancy, we’ve launched a content campaign across our social profiles to educate companies about the facts and fiction of the ERC. Other professionals, including Dan Chodan, have also consistently sounded the alarm about ERC fraudsters, and shared helpful ERC resources so clients and accountants don’t fall for ERC scams.

Sign 2: There are promises of ERC pre-qualifications

If I had a nickel for every time I heard clients tell me that someone told them they’re pre-qualified for the ERC, I’d own a Lamborghini. While you can make educated guesses about a company’s ERC eligibility based on self-reported figures or circumstances, it’s best to avoid providing an ERC eligibility determination for a client until after you’ve reviewed their financial statements and examined their circumstances.

If a client approaches you asking why you’ve found them ineligible, while another ERC professional said they were pre-qualified, point them back to the two main tests of ERC: the gross revenue test and the suspension test.

Sign 3: The ERC suspension test is being abused

Many ERC shops are qualifying companies for the ERC based on invalid suspension test criteria, such as OSHA recommendations and CDC guidelines, which do not fulfill the government mandate requirement. Below is a brief debunking of some popular but invalid ERC claims:

• Any government mandate is valid for ERC justification: IRS Notice 2021-20 specifically states that shutdowns must be directly tied to a COVID-19-related mandate.
• OSHA guidance is sufficient grounds for ERC: The COVID-19 page on the OSHA website clearly states that OSHA recommendations are advisory–not mandates, as required for ERC eligibility. Also, OSHA’s General Duty Clause, which requires employers to provide a safe workplace environment, is based on 1970 law, not in response to COVID-19.
• CDC guidance justifies ERC:  Question 20 of IRS Notice 2021-20 distinguishes between an employer who was partially suspended due to a government mandate and an employer who made adjustments to follow CDC guidelines. Only the first employer is described as fulfilling the partial suspension requirements for ERC eligibility; the second employer is described as merely “following guidelines.”

Sign 4: Supply chain issues automatically qualify for ERC

The IRS’ answer to Question 12 of Notice 2021-20 states that an employer can be considered to have an eligible full or partial suspension for ERC if a supplier is unable to make deliveries or continue operations because of a government order. Many ERC providers have interpreted this to mean that supplier shutdowns equal ERC eligibility, but there are two caveats to consider when using a supplier shutdown for ERC justification:

1. Did you try to find alternative suppliers? The example provided for Question 12 includes the following sentence: “Employer A is unable to procure raw materials from an alternate supplier.” This implies that if a company was impacted by a supplier shutdown due to a government order, a reasonable effort is expected to have been made to find an alternative supplier.
2. Can you prove the shutdown occurred due to a government mandate? When claiming the ERC, the onus is on your client to prove that they qualify for it. If they are using a supplier shutdown to qualify, they must retain valid documentation that shows a coronavirus-related government mandate specifically impacted their supplier.

ERC fraud is rampant, but you can avoid it

As the IRS focuses more on compliance, it’s prudent to examine your ERC partners to ensure they’re not engaged in, or connected to, questionable ERC practices. Most ERC providers have popped up overnight on the heels of the CARES Act, which means they have little reputation and credibility to consider—unlike those of us that have been diligently helping clients for many years before COVID-19 and the ERC ever arrived. From one honest professional to another, I hope these tips help you avoid ERC fraudsters and continue serving your clients.