If you own a business in Georgia, then you’ve likely received one or more messages promising thousands of dollars of easy money through something called the Employee Retention Credit (ERC).
Think this one over carefully.
The ERC, which Congress created as part of the CARES Act, is a refundable tax credit for businesses and tax-exempt organizations that suffered financially during COVID-19.
Reason Foundation Research Director Geoffrey Lawrence said these advertisements will surely tempt business owners.
“There are two sides of this coin. As federal taxpayers, this costs them money, and it depletes the value of the currency,” Lawrence said.
“On the other side of that coin is this is money that may be available for you, but if you don’t take it then you may see others who are your competitors take it.”
WHAT THE ERC ACTUALLY IS VS. HOW THIRD PARTIES REPRESENT IT
In addition to all the unsolicited phone calls, emails and text messages from third party vendors, the Georgia District of the U.S. Small Business Administration (SBA) promoted the ERC. As recently as last week, loan advisors recommended the program to members of Georgia’s hospitality industry.
One third-party promoter said in an email last month that the ERC “isn’t some super elaborate program.”
“This is a program where if your business has been going since Feb. 2020 or earlier, you made it through COVID, and you have more than five full-time employees, you can get a credit from the U.S. Government of up to $26,000 per employee (even if you already got PPP or if you didn’t have a decline in revenues),” said the promoter.
That promoter said he and his colleagues work only on a contingency basis and only accept payment when business owners accept the credit.
“There is no upfront cost to doing this,” the promoter added.
That same promoter did not return a request seeking more information about the program or the identity of his employer.
The IRS, however, warns of ERC scam promotions.
“Employers should be wary of ERC advertisements that advise them to ‘apply’ for money by claiming the ERC when they may not qualify,” the IRS said, adding that certain ads resemble official government letters, texts, emails and phone calls.
“Anyone who improperly claims the credit has to pay it back and may owe penalties and interest. The only way to claim the ERC is on a federal employment tax return.”
To qualify, businesses and tax-exempt organizations must meet one of the three following criteria:
- They were shut down by a government order due to the COVID-19 pandemic during 2020 or the first three calendar quarters of 2021.
- They experienced the required decline in gross receipts during the eligibility periods during 2020 or the first three calendar quarters of 2021.
- They qualified as a recovery startup business for the third or fourth quarters of 2021.
Eligible employers, the IRS added, must have paid qualified wages to claim the credit.
Private firms and government agencies throughout Georgia that promote ERC did not return requests for comment.
THE ERC AND ITS ACTUAL COSTS
Adam Michel directs Tax Policy Studies at the Washington, D.C.-based Cato Institute.
“What we are seeing now is businesses that didn’t claim the credit in the height of the pandemic are now, two and a half or more years later, filing for the credit simply because it is free money on the table,” Michel said, adding the ERC program was originally supposed to cost $55 billion, but it wasn’t long before costs expanded to over $85 billion.
“I think that shows how difficult it is for Congress to target the type of temporary aid that we were promised during the COVID pandemic. Congress thought this money would be true emergency aid to help struggling businesses over a couple of months at the height of the pandemic. But it has become a tens of billions of dollars windfall for many businesses that don’t need those funds.”
Lawrence, meanwhile, argues most of the COVID-19 stimulus money was unneeded.
“That’s true not just for this program, but a financial analysis of state and some local governments show they have plenty of revenue from sales taxes on other things during the pandemic,” Lawrence said.
“Federal appropriations just elevated state and local government spending more than anything. This will cost federal taxpayers a significant amount. It is financed through new money creations. The way we are paying for it is through inflation.”
Lawrence said neither he nor anyone else at the Reason Foundation has analyzed potential waste, fraud or abuse in the ERC program. He knows of no government audits for the program, at least not yet.
Michel said the ERC program “was ill-advised from the get-go.”
“I think this program created more headaches for the IRS and taxpayers claiming the credit and for the federal budget than it’s worth,” Michel said.
IRS staff members, Michel said, have a hard time determining ERC credit eligibility.
SHOULD CONGRESS RENEW?
The media warns that another COVID-19 outbreak is looming. Despite that, Michel said he does not believe Congress will renew the ERC.
“My fear is that in the next recession or economic downturn Congress has a history of picking up things they did in the past and simply renewing them,” Michel said.
“It’s important we learn the lessons here and don’t reach for this as an economic policy in future economic downturns.”
Lawrence said no one can make much of a case to renew the ERC, considering the United States currently has record-low unemployment.
Requests seeking comment on this matter from all 16 members of Georgia’s Congressional delegation, including U.S. Sen. Jon Ossoff (D-GA) and U.S. Sen. Raphael Warnock (D-GA) were not returned.
A BILL OF GOODS
“Congress writes tax laws that are too complicated and tries to do too many things. That is the root of the IRS’ problems, and the Employer Retention Tax Credit is just one manifestation of that,” Michel said.
“Congress wrote this credit in such a way that it is incredibly broad, difficult to administer and opens the tax system to these types of fraudulent schemes.”
Lawrence, meanwhile, said members of Congress could have tightened standards and clarified who does and does not qualify for the credit.
“Even if you sign up with one of these companies you ultimately bear the liability of an inaccurate or potentially fraudulent return,” Lawrence said.
“If this company files a credit for you then you split the refund when you get it, and that company takes off. You never hear from them again, and if it turns out they did something fraudulent then you are going to be on the hook for that down the line.”
Michel encourages Georgia business owners to ignore unsolicited phone calls from third parties who promote the ERC.
“If someone has a specific question about their eligibility then they should contact a licensed tax preparer and work with that person rather than respond to someone actively reaching out to you,” Michel said.
“I think that is the best way to make sure you are not sold a bill of goods.”