ERC Scams (5 Examples + How to Avoid Them)

whiteboard crypto logo
Published by:
Whiteboard Crypto

The Employee Retention Credit (ERC) is a special tax benefit designed to support businesses during the challenging times caused by the COVID-19 pandemic.

This credit was initiated to aid companies that continued paying their employees despite facing closures due to government-imposed COVID-related restrictions. While the ERC serves as a crucial financial support system for struggling businesses, it has regrettably become a target for fraud.

ERC scams involve deceitful promises or guarantees of quick and increased access to ERC credits. Scammers initiate contact through unsolicited emails, phone calls, or even social media, luring victims with false promises of expediting the application process or offering unusually high credit amounts.

To protect yourself from potential scams, it’s important to recognize and steer clear of these common types of fraudulent activities associated with the ERC.

1) False or Misleading Fee Structures

Some scammers posing as advocates for taxpayers in relation to the Employee Retention Credit engage in deceptive practices. They falsely assure individuals about their eligibility for the credit while purposefully disregarding the proper rules for calculating the credit. Their aim is to maximize the fees they charge.

Here’s how it works: legitimate service providers often charge a fee based on the ERC refund amount, aligning their success with the benefit received by the taxpayer. However, scammers deviate from this norm by demanding an exorbitant upfront fee, which is mostly nonrefundable.

They might deliberately delay or fail to submit your claim if they anticipate it will be denied. By initially exaggerating the promised claim amount, these scammers attempt to inflate their fees unfairly.

These deceitful practices exploit individuals by charging high upfront fees while manipulating the claim process to their advantage. Their aim is not to genuinely assist with ERC claims but rather to profit from unwarranted fees, often at the expense of those seeking legitimate support.

2) Identity Theft Scam

Identity theft involves stealing another person’s sensitive information to pretend to be that person. The ERC tax refund can be used by scammers to do this.

To claim the ERC, certain documents need to be filed, and these documents contain important and private details about a business and its workers.

Scammers might pretend to be ERC experts and try to trick employers into giving them this sensitive information. They might use this stolen data to apply for the Employee Retention Credits for themselves, pretending to be the business or its employees.

Identity theft has been a problem for a long time, and it’s a serious issue because it can cause financial harm and other problems for people whose information is stolen. Scammers are always looking for new ways to get hold of personal information, and situations like the ERC filing process provide them with another opportunity to do so.

It’s important that you be cautious and ensure that you only share sensitive information with trusted and verified sources. Beware of anyone who asks for personal or business details and claims to be related to the ERC process. Always double-check the credentials and legitimacy of anyone requesting such information.

To protect yourself and your business from identity theft, consider implementing security measures like using secure channels to share sensitive information, educating your employees about the risks of sharing personal details, and staying updated on the latest scams and fraud tactics.

3) Inflation of Qualified Wages Paid

Another way scammers manipulate the Employee Retention Credit (ERC) involves inflating the amount of wages they claim to have paid to their employees. These individuals aim to boost the ERC business tax credits they receive by exaggerating or falsely stating the wages they’ve supposedly paid.

It’s important to note that employers are accountable for accurately reporting their tax information, including ERC-related details. Even if an employer isn’t knowingly involved in a scam related to the Employee Retention Credit, making mistakes or inaccurately claiming the credit can lead to legal problems.

Claiming more than what was actually paid in qualified wages might prompt authorities to ask for credit repayment, accompanied by penalties and interest.

ERC scams that involve overstating wages paid can result in serious repercussions. Not only does it affect the credibility of the business and the individual involved, but it also impacts the entire tax system. Tax authorities constantly monitor for discrepancies in claims and may investigate suspicious claims to ensure compliance with the law.

To avoid getting caught up in such scams and to ensure compliance with tax regulations, it’s crucial for employers to accurately report and document their qualified wages. Employers should keep clear records of employee payments and ensure that the information reported for ERC claims matches these records.

4) Shell Company Fraud

Another deceitful tactic used in Employee Retention Credit (ERC) scams involves shell company fraud. Scammers create fake companies or manipulate existing ones to dishonestly claim the ERC. They might set up shell entities, which are essentially fake businesses with no significant operations or assets, solely created for fraudulent purposes.

These scammers might also alter existing legitimate companies by manipulating their information or structure to improperly funnel funds meant for the ERC. By doing so, they aim to mislead authorities into believing that these companies qualify for the credit when, in reality, they do not.

Shell company fraud can be intricate and damaging. It allows scammers to exploit loopholes and deceive authorities by presenting false information or fabricating the existence of businesses that are not legitimately entitled to claim the ERC.

This type of fraudulent activity not only affects the credibility of the individuals or entities involved but also undermines the integrity of the tax system.

Authorities are vigilant in monitoring for such fraudulent activities and scrutinize claims to identify inconsistencies or irregularities. Those found involved in creating fictitious companies or altering legitimate ones for ERC fraud can face severe consequences, including legal actions, fines, and penalties.

To safeguard against becoming unwittingly involved in shell company fraud related to ERC claims, businesses should verify the legitimacy of any companies they engage with for services or transactions.

It’s crucial to conduct thorough due diligence, review company details, and ensure that the companies involved in any business dealings are bona fide entities with genuine operations and legitimate purposes.

5) Payroll Provider Fraud

Some shady payroll service providers exploit their access to clients’ financial information. They misuse this data by filing false claims or redirecting tax credits without the business owner’s knowledge, causing financial harm.

When these providers have access to a company’s financial data, they misuse their trust. They engage in fraudulent activities related to tax credits, submitting false claims for credits like the Employee Retention Credit (ERC) or redirecting these credits elsewhere without informing the business owner.

This unauthorized manipulation of financial information harms affected businesses significantly. It leads to financial losses, potential legal issues, and disruptions to company financial stability. Moreover, business owners might remain unaware of these fraudulent actions until they face unexpected consequences.

To prevent falling victim to such deceitful practices by payroll service providers, businesses should exercise caution when choosing and working with these entities. They should conduct thorough background checks, review the provider’s track record, and ensure proper oversight of financial transactions to mitigate the risks associated with untrustworthy service providers.

Maintaining a close eye on financial statements, promptly reviewing tax filings, and establishing clear communication channels with the payroll service provider are essential steps in detecting and preventing any unauthorized or fraudulent activities.

Businesses should also consider regularly assessing their financial records to identify any discrepancies or irregularities that might indicate potential fraud.

Being vigilant and proactive in monitoring financial activities, ensuring transparency in transactions, and promptly addressing any suspicions or concerns regarding payroll service providers can safeguard businesses from the detrimental impact of such deceptive behavior.

Regular audits and seeking professional advice can further strengthen a business’s defenses against payroll provider deception.

How To Avoid ERC Scams

Watch out for false promises – Be careful with any company or promoter that guarantees your eligibility or the amount you can claim. The ERC has many factors, so guarantees can be misleading. If someone promises before understanding your business’s COVID-19 impact, they might not be trustworthy.

Have real conversations – Be cautious if someone avoids talking with you directly and prefers only email, texts, or chatbots. ERC rules are complex, so live interaction is crucial. If they avoid it, it could be a red flag.

Check Email Details – Make sure the email addresses match the names of the person and the company. If they use personal email accounts like Gmail for business matters, it might not be reliable.

Avoid exaggerated claims – Avoid companies that inflate claims or fees by overestimating employee wages. Scammers might falsify records to increase claims, which could get you in trouble with the IRS.

Get it in writing – A legit ERC service provider will offer written terms. If they refuse to do this, it’s a warning sign.

Look for audit protection – Choose companies offering audit protection. It shows they’re confident in their work.

Research thoroughly – Check the company’s reputation and history. See their Better Business Bureau rating and reviews. Ask about their experience and the types of credits they handle.

If you’re doubtful or receive suspicious IRS-related messages, don’t click links. Forward suspicious emails to [email protected] or call the IRS directly. Report any scams to the Treasury Inspector General for Tax Administration at 800-366-4484.

The Employee Retention Credit (ERC) is a complicated tax credit program that has specific and strict qualifications. Due to the high risk of fraud, businesses should collaborate with knowledgeable professionals to assess their eligibility for this tax credit.

If you suspect that you’ve fallen victim to an ERC tax fraud scheme, swift action is absolutely critical. First and foremost, report the incident to the IRS, providing as much detail as possible about the suspected fraud.

Additionally, reach out to legal and financial advisors specializing in tax matters to guide you through the steps necessary to protect your business and rectify any potential damage caused by the Scam.

Remember, staying informed, vigilant, and seeking expert advice are super important in safeguarding your business against ERC-related scams. Being proactive in understanding the intricacies of the tax credit and staying alert to potential fraud can significantly mitigate risks and protect your business’s financial well-being.

whiteboard crypto logo

WhiteboardCrypto is the #1 online resource for crypto education that explains topics of the cryptocurrency world using analogies, stories, and examples so that anyone can easily understand them. Growing to over 870,000 Youtube subscribers, the content has been shared around the world, played in public conferences and universities, and even in Congress.