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We heard the radio commercials. We saw the tweets. Many small business owners and others have been inundated with spam calls touting how the employee retention credit — worth up to $26,000 per employee — could be a real game changer.
If you’re starved for cash, you can imagine that this tax relief could apply to anyone forced to continue working during the pandemic. A very good deal.
But it can’t be true, right?
Yes, if it sounds silly, it probably is – and you could lose a lot of money along the way.
One of the problems with chasing big bucks with a tweet or radio ad is that you’re paying big bucks upfront to fast talkers who aren’t telling the real deal. And they could get in trouble with the Internal Revenue Service.
If you claim the credit when you shouldn’t have claimed it, you’ll have to pay it back – with interest and penalties. Some small businesses can end up owing hundreds of thousands of dollars or more if they file an improper claim.
The IRS is once again warning that some foreign companies are heavily promoting tax credit schemes on radio and social media. Even worse, people argue with their tax professionals about why they suddenly think they deserve these credits when, no, they really don’t.
The IRS said: “Tax preparers continue to be pressured by people who want to claim improper credits.”
What is the Employee Retention Credit?
This is a refundable tax credit for businesses that continue to pay employees on gross receipts from March 13, 2020 through December 31, 2021, while the company is closed during the COVID-19 pandemic.
For 2020, eligible employers can claim up to 50% of $10,000 of eligible wages or health plan costs per employee — or a maximum of $5,000 per employee.
For 2021, up to 70% of expenses up to $10,000 can be claimed up to a maximum of $7,000 per employee.
The credit will apply to the last three quarters of 2020 and the first three quarters of 2021.
Combine the two years and you can earn up to $26,000 per employee in advertising.
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Why doesn’t it work for many?
Keyword: businesses. First, you should know that this credit does not apply to individual employees. It is a credit for businesses, not all taxpayers.
As with many tax laws, especially those created for pandemic relief, we’re talking about complex guidelines here.
For example, the IRS states that qualified employers may use the payroll deduction credit previously reported as wages to obtain loan forgiveness or other credit from the Payroll Protection Program.
There are many gray areas when it comes to qualifying for the credit, says John Williamson, senior manager of tax policy and advocacy at the American Institute of Certified Public Accountants. Some credit and incentive organizations, he said, use a very loose definition of the terms and conditions of the tax credit to make it appear that many businesses are not eligible.
The pandemic-related credit will not be granted for business activity in 2022 and beyond. But continued announcements will prompt some businesses to update their previous returns for 2020 or 2021 to take advantage of the generous credit in the CARES Act.
In the year The Coronavirus Relief, Relief, and Economic Security Act, enacted on March 27, 2020, introduced a worker retention tax credit to encourage eligible employers to keep people on the payroll despite tough economic conditions.
Many companies have already claimed the credit. But foreign companies continue to push it as an alternative to others on radio ads and social media.
“There is a constant barrage of advertising that these funds are available if the pandemic pays workers,” Williamson said.
The ads seem to imply that credit is a sure thing when it isn’t.
There are two separate and distinct challenges, he said. One includes seeing if total receipts have fallen during this period, including sales; Another concerns the impact of a government shutdown.
For example, Williamson said, the credit and incentives organization could make the argument that every business was affected by the government shutdown during the pandemic. But that’s too general.
When it comes to tax credits, he said, you have to look at how the government shutdown has affected business operations. A “shutdown” claim can be made if the outbreak proves that the business has been affected by the outbreak, either in whole or in part.
Who is ineligible?
For example, consider a business with high gross receipts during a pandemic. Maybe the business closed its offices and sent the employees home, but the employees worked effectively from home. The workers are efficient and able to do the same work as before the epidemic. No business was disrupted, and the business continued to generate revenue. Such a business is not affected by the closure under the definition of the employee retention credit, Williamson said, and may not qualify for the credit.
In general, he said, a business would qualify if a company saw a significant drop in gross receipts in 2020 or the first three quarters of 2020 when the government restricts “business, travel or group gatherings” due to Covid-19. of 2021.
You never want your gross receipts to drop, he says, but if you’ve seen a 75% drop due to the pandemic, you’ll have a higher comfort level claiming the employee retention credit.
“This is a fact based on numbers and hard to claim,” he said.
What about the person who continues to work? No, you will never get credit now or ever.
“I see where the confusion comes in when you often associate the word ’employee’ with credit. But again, it’s a credit to the employee, not the employer,” Williamson said.
Mark Steber, tax officer at Jackson Hewitt Tax Services, said the credit itself has been abused by fraudsters.
“I think most of the professionals who offer to help or assist with employer retention credit are very legitimate and professional in this area,” Steber said.
But all and some are simply not criminals.
Fraudsters look for all kinds of ways to engineer tax refunds that aren’t in process, he said.
“Tax benefits and the cash associated with them sometimes attract bad players,” Steber said.
It probably seems like it should be obvious, but you shouldn’t expect to find solid and comprehensive tax advice on Twitter or TikTok. The IRS has also warned of other schemes to avoid this tax season.
A scheme now spreading on social media, according to the IRS, encourages people to use tax software to manually fill out their own Forms W-2, Wage and Tax Statements. You pick the employer, you pick the income, and then you create a fake number for fake withheld taxes.
According to the IRS, people are told to electronically file their false tax returns to receive “larger refunds – sometimes as high as five figures – with huge deductions.”
The taxpayer is responsible for filing false claims.
Yeah, not a smart idea.
You don’t want to claim any credits or tax refunds you don’t qualify for.
The IRS issued a similar warning in October that “the tax savings from pass-through plans and direct debits are too good to be true.”
In some cases, the IRS warns, you can overstate your payroll deductions.
The IRS warns that advertisers are aggressively misleading people. You should be skeptical and review the instructions.
If a tax professional raises questions about the validity of such a claim and tries to warn you against claiming the employee withholding credit, you should listen to their advice, according to Acting IRS Commissioner Doug O’Donnell.
“The IRS is actively auditing and conducting criminal investigations related to these false claims. People should think twice before claiming this,” O’Donnell said in a statement.
The IRS says taxpayers can report tax-related irregularities on Form 14242 in connection with employee retention credit claims.
If a business or individual claims the credit when they know they shouldn’t, the IRS and tax professionals recommend filing an amended return to correct any overstated payroll deductions.
Contact Susan Tompar: stompor@freepress.com. Follow her on Twitter. @Tompar. To subscribe, please go to freep.com/specialoffer
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