Employee Retention Credit Fraud (aka “Why We Hate ERC Mills”)

May 15, 2024

Despite the great intention behind the Employee Retention Credit (ERC), it has unfortunately spawned many scams and schemes to trick honest taxpayers and business owners. Unscrupulous individuals and organizations are taking advantage of the widespread confusion and desperation surrounding the ERC to trick taxpayers into filing illegal ERC applications. These fraudsters typically operate by misrepresenting the eligibility criteria and computation for the ERC, often leading to false claims and applications of which they receive a percentage.

No Love Lost Between Accountants & ERC Mills

CPA Dan Chodan has unaffectionately dubbed ERC fraudsters as “ERC mills” because of their penchant for processing ERC client applications hastily and with little thought or due diligence. Since the first ERC fraud scheme appeared, Dan has become an “ERC fraud vigilante,” sharing resources, news, and tips with legitimate professionals that are tired of competing with the false promises made by ERC mills to ineligible businesses. Initially, we were outraged, then weary. Now, legitimate accountants and tax professionals have a simmering hatred of the slipshod tactics of ERC mills.

Why the strong words from CPA Alicyn McLeod, enrolled agent Adam Markowitz, and CPA Nicole Davis

Well, imagine working hard every day to do things right for clients and then having a fast-talking slimeball persuade them out of working with you using false promises. That’s exactly what’s been happening with accountants and accounting firms throughout the United States. 

After accountants have done their due diligence to determine their client’s actual ERC eligibility, an ERC mill slides in and persuades the client that they’re actually eligible and that their accountant doesn’t really understand the “nuances” (read: loopholes) of the ERC.

Infuriating, isn’t it?

The Top ERC Fraud Schemes And Lies You Shouldn’t Believe

Okay, enough ranting about ERC mills. Let’s get down to business and explain the popular fraud schemes right now and how you can avoid falling for them.

  • Citing OSHA guidance as the basis for ERC eligibility: OSHA’s advisory notices are often cited as grounds for many ERC claims, but they aren’t sufficient nor an appropriate authority in ERC matters. The COVID page of OSHA’s website is advisory, which doesn’t fulfill the mandate requirement of IRC Section 3134. Also, OSHA’s General Duty Clause – often referenced as grounds for ERC – is based on 1970 law, not in response to COVID as required by IRC Section 3134.
  • Relying on CDC guidelines for ERC claims: Question 20 of IRS Notice 2021-20 states that only an employer who closes in response to a direct government mandate is potentially eligible for the ERC. An employer that closes its doors to comply with CDC guidelines is described by the IRS as merely “following CDC guidelines.”
  • Thinking all supplier shutdowns make you ERC-eligible: Question 12 of IRS Notice 2021-20 states that if a business is unable to get “critical materials from its suppliers because they were required to suspend operations, the business would be considered an eligible employer.” This has been abused to the point of being used to qualify any company that experienced vendor trouble during 2020 and 2021. But it’s worth noting that ERC eligibility depends on the client’s inability to find an alternative supplier. Only rely on a supplier shutdown when you can be diligent about documenting your failed efforts to obtain an alternative supplier.

Understand The Risks Of Fly-By-Night ERC Shops

As I recently warned Karbon Magazine readers, many ERC shops appeared overnight to seize the opportunities presented by the ERC. They can disappear just as quickly. And, as the IRS warned in IR-2023-40, “[You should be] cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns [emphasis added]. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.”

Learn The $2 Trillion Lesson Now And Avoid ERC Fraud

As I wrote about here, an August 2022 TIGTA report revealed that the IRS had identified $2 trillion in false ERC claims. Since the IRS is increasingly focused on identifying and pursuing justice for fraudulent ERC claims so it’s in your best interest to avoid falling for it, no matter how lucrative it seems to be.

If you do learn of an Employee Retention Credit fraud scheme, you can report it to the IRS by following the instructions in IR-2023-49 and mailing or faxing Form 14242, Report Suspected Abusive Tax Promotions or Preparers to the IRS. You can fax the form to the IRS, or mail it to the following address:

Internal Revenue Service Lead Development Center

Stop MS5040

24000 Avila Road

Laguna Niguel, California 92677-3405

Fax: 877-477-9135

You can also report it to the IRS Whistleblower Office.

Tired Of Fakes? Get Legitimate & Trustworthy Help From Our Team! 

If you’re skeptical about the too-good-to-be-true promises of ERC shops and want ERC results that you can trust, contact us today. You can view the results we’ve achieved for past clients here and then use our contact form to request a free consultation about your specific circumstances.