The IRS has issued an alert to businesses nationwide: beware of potential scams related to the Employee Retention Credit (ERC).

The ERC is a federal refundable tax credit of up to $7,000 per employee, per quarter. Businesses and tax-exempt organizations that had employees and were affected by the COVID-19 pandemic can claim this tax credit. (Individuals do not qualify for it.)

Eligible businesses must have paid wages to employees after March 12, 2020, and before Jan. 1, 2022. Additional qualifications include being ordered by the government to shut down due to COVID-19 during 2020 or the first three calendar quarters of 2021; experiencing a significant decline in gross receipts during eligibility periods in 2020 or the first three calendar quarters of 2021; or qualifying as a recovery startup business in the third or fourth quarters of 2021. Full eligibility requirements can be found on the IRS website.

This tax credit is especially appealing to businesses because it reduces their tax bill dollar for dollar, rather than reducing taxable income like a typical tax deduction does. Because it’s a refundable tax credit, if the company’s credit is more than the amount of tax it owes, the government issues a check for the remaining balance.

For the 2020 tax year, the ERC pays 50% of up to $10,000 of an employee’s wages from March 13 to Dec. 31. For the 2021 tax year, the amount increases to 70% of up to $10,000 of an employee’s wages for each quarter. (Note that employers can’t claim the ERC on wages that were included in forgiven Paycheck Protection Program loans.)

Although the ERC wasn’t renewed for the tax year 2022, employers may still claim credits for 2020 and 2021 by filing an amended tax return. Because of that, a few unscrupulous tax preparers have been targeting businesses through mailers, social media and radio and TV ads.

The IRS is warning business owners to beware of unsolicited calls, emails and texts from unknown “tax preparers.” Because the ERC involves a complex calculation that requires employers to reduce wage deductions by the amount of the ERC (requiring amending multiple parts of a tax return) and because not every business qualifies for the tax credit, it necessitates careful review.

Therefore, the IRS cautions business owners to vet any tax preparer, but especially those claiming they can determine the company’s eligibility within minutes or claiming that your company qualifies before discussing your tax situation. Charging a big upfront fee to claim the credit is also a red flag.

The AARP lists additional signs of ERC scammers:

• They refuse to sign your return, or don’t have an IRS preparer tax identification number.
• They base their charges on a percentage of your refund.
• They ask you to sign a blank or incomplete tax form.
• They file the return without allowing you to review it. 

Any tax preparer claiming there’s nothing to lose by submitting a claim isn’t being honest. Improperly claiming the credit for your business would mean having to repay money received, as well as potentially owing interest and penalties.