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Claiming Multiple Tax Credits Requires Preparation In Light of Increased Audits

By December 16, 2022December 19th, 2022No Comments
Employee Retention Credit - DST Advisory Group blog

The IRS has recently announced that due to an increased number of fraudulent claims, they have reason to provide a higher level of scrutiny for certain tax credits that were established as part of the Covid relief. One of the claims in question is the Employee Retention Tax Credit (ERTC). 

The Rise of Fraudulent ERTC Claims 

Oftentimes, taxpayers rely on practitioners or providers to take advantage of these claims. However, some of these practitioners, who some people have referred to as “Tax Credit Mills” or “ERC Mills,” are taking aggressive means and fraudulent positions in the hopes of making a quick buck. 

In an article on Accounting Today, Ian Williams states, “One of the biggest issues being discussed by the IRS, Congress, and the AICPA is the millions of businesses that are being targeted by tax credit companies looking to help them claim the employee retention tax credit [ERTC].” The IRS and AICPA are finding that not all companies who have submitted an ERTC claim meet its criteria. As a result, the IRS is looking into aggressively auditing these claims and other tax provisions and benefits that were established to help taxpayers. 

Therefore, audits are on the rise. 

The Resulting Risk

In the case where a taxpayer is chosen for an examination for their employee retention credit, other credits or aspects of their tax return could be pulled into the examination due to the general nature of business credit examinations. For instance, if the taxpayer has an existing 6765 form claim, the Research Tax Credit (RTC) could then be pulled into the examination as well. This is not out of fear that the RTC is fraudulent or not qualified, but because there are procedures put into place where the examiner must pull in other credits during the audit. 

Furthermore, there are aspects of the ERTC that must be considered and removed from the RTC calculation. For instance, any wages included in the Employee Retention Credit must be removed from the Research Tax Credit to avoid double-dipping . As a result, there is a natural linkage between the two credits. Although we have not seen it yet, it seems inevitable that if one credit is pulled for an examination, the other could follow due to the connection. 

Does this mean that taxpayers shouldn’t be claiming the ERC or other tax credits? Not at all, but taxpayers should take precautions when they come across these ERC mills that are taking aggressive stances. 

What Can Taxpayers Do to Protect Themselves? 

  1. Work with a reputable provider. Check your provider’s references and audit experience.
  2. Get a strong deliverable that meets the requirements of the claim. From a research tax credit perspective, for instance, contemporaneous documentation is vital. Your provider should also be engaging tax engineers, working with your team early on, and communicating with your CPA. 
  3. Ask questions. If you are unsure if you qualify for a claim, ask your CPA or provider.
  4. Be prepared. If you are claiming a tax credit that is risky or is being targeted by the IRS, do not think that if you are chosen for an exam that only that specific claim will be under scrutiny.  

No one wants the IRS knocking on their door. However, if the IRS does, the worst position one can be in is with an unsupported or fraudulent claim. Having a reputable and trustworthy provider helps negate those worries. 

References

https://news.bloombergtax.com/tax-insights-and-commentary/irs-warns-taxpayers-on-false-employee-retention-credit-claims

https://www.accountingtoday.com/opinion/irs-to-target-abusive-ertc-claims