The Employee Retention Credit: Helpful Benefit or Significant Risk?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, designed to stimulate the economy during the early days of the COVID-19 pandemic, contained a provision few initially noticed: the Employee Retention Credit (ERC).

The ERC provides employers, including tax-exempt entities like churches, funds in the form of financial credits for retaining employees during financial downturns or during times when pandemic-related mandates disrupted operations.

The credits are generous, and could prove quite large, depending on an employer’s size.

In 2021, Church Law & Tax published a comprehensive article by CPAs Kaylyn Varnum, Michele Wales, and Mike Batts. It further explains the credit, how it works, and how churches can determine their eligibility and potentially pursue it.

Because of the amount of money potentially available, interest in the ERC has exploded, much of it driven through massive advertising efforts by businesses seeking to assist employers.

Unfortunately, many of these third parties have provided incorrect—if not fraudulent—guidance while advising employers to seek the credit. Employers can face significant penalties if they claim a credit that is improper.

Last November, the Internal Revenue Service (IRS) issued a Tax Tip outlining these concerns. By some estimates, the potential fraud could prove sizable. The Treasury Inspector General for Tax Administration’s “Semiannual Report to Congress” last September noted a Utah case in which a man attempted to claim more than $11 million in ERC claims. An Accounting Today article contends fraudulent claims made using the ERC may already total $2 trillion, suggesting the ERC could be the largest tax-related scam in the country’s history.

On March 20, 2023 the IRS upped the ante and added the ERC to it’s annual dirty dozen list. “The aggressive marketing of these credits is deeply troubling and a major concern for the IRS,” said IRS Commissioner Danny Werfel. “Businesses need to think twice before filing a claim for these credits.”

However, efforts by these third parties have only intensified in the form of television, radio, and internet advertising and direct calls to employers. That’s likely only going to continue since employers can generally seek the credit through April 15, 2025.

Church Law & Tax asked Batts, one of its longtime senior editorial advisors, for help in understanding why churches should still explore their eligibility, but exercise caution as they do.

Hardly anyone knew the ERC existed 18 months ago, let alone understood the financial benefit available to them if they met the criteria. We spent a lot of time and energy trying to get employers to pay attention and pursue it.

What’s happening now is that we have a growing number of bad actors who are targeting employers, promising them the moon on a contingency-fee basis, then getting the employers to claim credits…some of which are improper. In many cases, the bad actors do not adequately consider the facts and the law to determine if the employers truly qualify.

We have clients, including churches, getting contacted all the time by these third parties.

The average ERC claim for one of our clients is worth about $500,000. Some are less. Some are in the millions. Many churches are rightfully eligible and would very much benefit from this.

Now think about claims being made erroneously or fraudulently. If one church that does qualify can validly claim several hundred thousand dollars or more, when you extrapolate the numbers on a nationwide basis, the overall amounts for this tax credit nationally are huge—unlike anything we’ve ever seen.

Multiple criteria must be met for an employer to qualify for the ERC for any particular calendar quarter during the relevant eligibility period (which is generally most of 2020 and the first three calendar quarters of 2021). Those criteria include either a decline in “gross receipts” (a technical term with great significance) or a partial suspension of operations due to specific government orders.

Many of these third parties aren’t doing due diligence to determine whether the employer qualifies or whether the amounts claimed are accurate.

Here’s why the ERC is ripe for fraud: An employer claims the credit through an amended payroll tax return and doesn’t need to submit any documentation or explanation with it.

A provider will call and say the church just needs to answer a few preliminary questions. Do you have employees? Did you operate differently during COVID-19 restrictions? Most everyone, of course, says yes.

An unscrupulous provider may then ask for specific numbers of employees and comes up with a “calculation” of the total credit and says the church should make the claim—and it says it won’t receive its 10- to 12-percent contingency fee unless the church receives the credit funds from the IRS.

Some providers even say they’ll represent the church if the IRS later comes after them. So, a pastor or leader thinks, What have I got to lose?

Yes. When the church files the amended payroll tax return and says it qualifies for the credit, it does so under penalty of perjury.

If the proper due diligence hasn’t been done in making the claim, that’s a problem. Potentially, a big problem.

When the IRS receives the amended return, it often processes and pays the claim because it’s a relief credit and there’s pressure on the IRS to get the funds out. The IRS is under no legal requirement to pre-audit or pre-verify credit claims, and the IRS isn’t currently adequately staffed to do so.

But by law, the IRS still has up to five years to audit a claim. News reports indicate the IRS has put analytics into place to start flagging suspicious claims. In some instances, some of these bad actors are getting caught, which can put their client lists into the hands of the IRS and can subject those clients to possible audits.

If a church makes a bad claim and the IRS later catches it, the best-case scenario is that the church pays back the credit, plus interest. A worse case is that it pays back the credit, plus interest, and penalties. And the worst case is that the penalties are severe, and if there’s evidence the church leader who signed off knew the claim was false, he or she could potentially face criminal charges.

I suggest keeping the following tips in mind:

(Editor’s Note: This interview was edited for length and clarity and includes excerpts providing further details from a piece recently written by Batts for his firm’s clients.)