On November 7, 2022, the IRS published a “Tax Tip” warning employers against, “third parties advising them to claim the employee retention credit when they may not qualify.” About a week prior, the U.S. Treasury Inspector General for Tax Administration (TIGTA) published their Semiannual Report to Congress. Within that report, TIGTA highlighted the conviction, in May 2022, of an individual involved in an $11 million ERC fraud scheme to file false claims. According to court documents, one example of the scheme involved filing nine separate Forms 7200 for $10,000 each on behalf of a single LLC that didn’t actually have any employees other than the owner.
In court documents, the defendant explained that his employer:
“advised me and other employees at BUSINESS A that it was their position that every business was impacted by COVID and, therefore, that every business should qualify for the COVID-related tax benefits. The founders further advised me that the spouse of married owners of single member LLCs should be claimed as an employee of the business, and that sick and/or family leave should be claimed when the owner of the single member LLC had children. The founders discussed, in my presence, that it would be difficult for the IRS to prove whether or not a spouse was actually employed by the business. I understood that, by claiming the spouse as an employee, the amount of ERC available to the client business would increase. I also understood that claiming sick and/or family leave would greatly increase the amount of COVID-related tax credits available to the client business…. In preparing the Forms 7200 and 941 to claim the ERC, I routinely claimed the maximum allowable ERC per employee. If the client was married, I routinely added the spouse as a second employee of the company. I did not routinely obtain any information from the client as to whether the spouse actually worked for the company or was actually paid a wage. Rather, qualifying wages paid to each employee were determined by me, based on what the client stated his/her estimated future income to the LLC would be in the year.”
The defendant also stated that he routinely signed tax forms on behalf of clients without their knowledge.
Two more recent ERC fraud cases have been brought in the U.S. District Court Northern District of Mississippi. Each of these cases appear to be connected to a wider conspiracy in which 14 people in Mississippi were arrested and charged in the same Court with wire fraud and money laundering for filing false and fraudulent PPP applications. According to court documents, the alleged lead co-conspirators owned and operated Unity Tax Express in Byhalia, MS.
On November 2, 2022, the U.S. Department of Justice filed a suit to seize a $165,000 ERC refund check obtained by an individual in Memphis, TN. According to court documents, that individual, “utilized an entity named Utility Brokerage [sic] to assist him in applying for the ERC. [He] advised that he initially had contact with a female employed by Utility [sic] via telephone and later he delivered paperwork to her business location in Byhalia, Mississippi. Based on information and belief, the female to whom [he] delivered paperwork is currently under indictment in the Northern District of Mississippi for a Paycheck Protection Program conspiracy.”
This individual furthermore, “advised agents that during the time period for which the ERC covers he briefly employed two people and that it did not work out with the employees. [He] could not identify either claimed employee and stated that he did not have any personnel records or contact information for either employee. Despite his admission that he only briefly employed two employees, in applying for the ERC [he] reported to the Internal Revenue Service on a Federal Form 944 that [his company] paid out wages, tips, and compensation in the amount of $257,788.00 in 2020 in order to claim and receive an ERC in the amount of $165,000.00.”
Then, on November 16, 2022, the USDOJ filed a suit to seize $314,756 in ERC refund checks paid to an entity in Mississippi. When the bank placed an administrative hold on the checks, IRS Criminal Investigation agents investigated and interviewed the businesses owner. According to court documents, the business had been assisted by the same principal of Unity Tax Express currently under indictment for their, “alleged participation in a large-scale Payroll Protection Program and Economic Injury Disaster Loan fraud scheme.”
The CI agents showed the business owner copies of her 2020 and 2021 Forms 1040 which showed no wage expenses for employees. She, “advised agents that she received the two United States Treasury Checks totaling $314,756.00 as a grant from the federal government related to the COVID-19 Pandemic covering the period of late 2019 through 2020. Agents advised [her] that the two United States Treasury Checks were Employee Retention Credit (‘ERC’) tax refunds.” Then the agents showed her her entity’s 2020 and 2021 Forms 944, which she did not recognize and confirmed that she never incurred the wage expenses reported on those forms.
According to court records, “she utilized Unity Brokerage … to assist her in applying for what [she] referred to as government grants. [She] advised that she saw an advertisement online for COVID-19 related government grants. [She] responded to the advertisement and had contact with a female employed by Unity. [She] was advised to provide her Employer Identification Number (‘EIN’) and the number of individuals employed by [her] to the business location in North Mississippi, specifically the Holly Springs or Byhalia area. [She] advised agents that during the time period for which the ERC covers she employed three people in addition to contract laborers. However, [she], with the assistance of Unity Brokerage, reported to the Internal Revenue Service on a Form 944 that [her company] paid out wages, tips, and compensation in the amount of $268,956.00 in 2020 and $317,588.00 in 2021 in order to claim and receive an ERC in the amount of $149,000.00 for 2020 and $165,759.00 for 2021.”
There are important instructions and guidelines for qualifying employers applying for the ERC. Learn more by scheduling a demo with Experian Employer Services.