Increased IRS Scrutiny of Employee Retention Credit

Written by Katherine Johnson, Esq. Updated Apr 19, 2023.


Recently, the Internal Revenue Service (IRS) published its annual Dirty Dozen list, which is intended to raise taxpayer awareness of potential scams and fraudulent tax practices. The list includes cautions against falling prey to scammers calling and texting to pose as IRS or state tax officials, reminding taxpayers that the IRS initiates contact with taxpayers primarily through regular mail and never through email, text, or social media. Additionally, the IRS advised against acting on tax tips posted on social media, noting a couple of specific tax schemes that have recently gone viral amount of tax fraud.

This year, the first item on the 2023 list was a warning against companies aggressively marketing the Employee Retention Credit (ERC). Some of the main concerns included providers promising companies they can receive a maximum $26,000 of payroll tax credits per employee without qualification and pressuring companies to claim ERC that are ineligible for the credit. IRS Commissioner, Danny Werfel, is quoted as saying, "The aggressive marketing of these credits is deeply troubling and a major concern for the IRS. … [T]here are promoters misleading people and businesses into thinking they can claim these credits.” For instance, only a limited set of businesses that meet the Recovery Startup criteria are eligible for Q4 2021, and not all providers are providing the appropriate guidance for eligibility and calculation of the credit. Mr. Werfel cautioned that "Businesses need to think twice before filing a claim for these credits. … People should remember the IRS is actively auditing and conducting criminal investigations related to these false claims. We urge honest taxpayers not to be caught up in these schemes."

ERC is a powerful, refundable payroll tax credit that rewards employers who retained employees during the COVID-19 pandemic.  To qualify for ERC, employers must satisfy at least one of these requirements: operations were fully or partially suspended due to a government-issued order, or the company experienced a significant decline in gross receipts during the pandemic (calculated on a calendar quarter basis).

The IRS has provided warnings against the pitfalls of improperly claiming ERC since last fall, and Daniel Lauer, IRS Director of the Small Business/Self-Employed Examination – Specialty, reinforced this message in a recent presentation at the American Payroll Association’s (APA) Capital Summit. Mr. Lauer advised that “[a]nyone who’s considering claiming [ERC] needs to carefully review the guidelines.”

Learn More: 5 Things to Know About the ERC


Mr. Lauer noted that one of the most frequent issues his examiners are finding is inappropriate ERC claims. Some of the problems he noted include the distinction between government-ordered shutdowns of a business versus a “voluntary” closure, validation of wage expenses, and distinguishing qualified wages from wages used for the Paycheck Protection Program (PPP) loan forgiveness. Mr. Lauer also articulated that in the event of a review, the information requested by his team is “quite comprehensive” and can consist of, but is not limited to, the following:

  • Copy of the worksheets from the Form 941 or 941-X instructions;
  • List of employees who received wages and calculation of ERC claimed;
  • Methodology for calculation of qualified wages and health plan expenses;
  • Detailed support and procedure for determining qualifying periods, including gross receipt calculations and support for government shutdown eligibility; and
  • PPP loan application and forgiveness application with supporting calculation.

Overall, the guidance from the IRS is simple: make sure you are qualified before claiming ERC and rely on tax experts for direction.

Contact CTI today and let our team of experts work to determine eligibility. We can help provide accurate information to ensure you qualify for ERC and that your claim is precise and backed by a substantiation package tailored to satisfy the expectations of the IRS.


 Work Opportunity Tax Credit (WOTC) Guide

Topics: Legal News, COVID-19, Federal

Katherine Johnson, Esq

Written by Katherine Johnson, Esq

Katherine (Kate), is the Director of Strategy and Business Operations and provides thought leadership on new and emerging areas of tax law and incentives for CTI’s clients. Through her professional experience, she has overseen hundreds of Research & Development (R&D) and Employee Retention Credit (ERC) studies as well as defended clients in matters before the IRS. Kate earned her J.D. from the University of Arizona and received her undergraduate degrees from Southern Methodist University.