On March 7, 2023, the IRS issued a third warning urging employers to be wary of promoters who push ineligible employers to claim the Employee Retention Credit (“ERC”). The IRS issued its first warning on October 19, 2022, and a second warning on November 7, 2022. In its most recent notice, the IRS warns that such promoters often charge large upfront fees or a fee based off a percentage of the ERC claimed. It also notes that many of these promoters fail to inform employers that wage deductions taken on a federal income tax return must be reduced by the amount of the credit, including amending previously filed income tax returns to reflect such deduction. Acting IRS Commissioner Doug O’Donnell has stated, “The IRS is actively auditing and conducting criminal investigations related to these false claims.”

If you are approached by or are considering using an ERC consulting service, we recommend consulting a qualified tax professional regarding your eligibility to claim the ERC. In addition, acquirors in M&A transactions should engage tax professionals to diligence any ERC claims made by a target company to assess the risk surrounding the ERC claim and to negotiate protections depending on the level of such risk. Unprotected acquirors in M&A transactions could be left holding the bag if the IRS audits a target company’s ERC claims. This could result in the acquiror not only having to pay back the credit but also having to pay penalties (which could be 20% or more of the improperly claimed credit) and interest.