Dentists should exercise caution before claiming Employee Retention Credit

March 23, 2023
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Dentists and employers in California and throughout the U.S. have been receiving advertisements and direct solicitations from third parties offering attractive tax savings in the form of the Employee Retention Credit (ERC, also commonly referred to as ERTC). These third parties often falsely promise employers eligibility for the ERC, compute their alleged credit and even file amended employment tax returns in exchange for large lump sum payments based on the calculated amount of the ERC to be received.

The ERC is a refundable tax credit for businesses that continued to pay employees during government-mandated shutdowns due to the COVID-19 pandemic or that had significant declines in gross receipts from March 13, 2020, to Sept. 30, 2021. (Only designated recovery startup businesses may claim credit for the final quarter of 2021.) Eligible employers can claim the ERC on amended employment tax returns for quarters that they qualify for.

ERC can benefit businesses of all types that struggled through the pandemic and be helpful to businesses that are currently experiencing financial challenges. However, third parties have used and continue to use money-making schemes to prey on those same businesses that have been challenged by the pandemic and current economy.

Dentists may have already received emails, calls and targeted social media or other advertisements with appealing phrases such as, “Your business may be entitled to payroll credits of $26,000 per employee.” These companies recently have even ramped up their marketing significantly because businesses that may want to amend their payroll tax returns to claim the ERC for 2020 will need to do so before 2025.

If it seems too good to be true, it probably is

Third-party companies do not disclose in their marketing that their determinations of ERC-eligibility frequently do not conform to IRS guidance on qualification for the credit. They will even qualify businesses that are not actually eligible.

In addition, these predatory businesses often charge large upfront fees that are contingent on the amount of the supposed refund, and they may not inform taxpayers that wage deductions claimed on their business's federal income tax return must be reduced by the amount of the credit. A business that falls for one of these third-party schemes could be required to repay the amount received plus interest and penalties.

The IRS is aware that predatory businesses are offering ERC assistance and released information on fraudulent reporting last October. As a result of fraudulent claims related to the ERC, the IRS implemented additional processes for ERC refund claims that are over a certain dollar amount that has not been publicly disclosed.

The IRS on March 7 issued an additional warning on the risk of false ETC claims. Like other organizations, the IRS is gaining momentum after COVID-19 shutdowns and has begun to audit businesses again. The IRS has been hiring and training staff to audit ERC claims more thoroughly because of fraudulent reporting.

File with caution, maintain proper records

If your dental practice is considering filing for ERC or has already done so, it is extremely important to maintain proper records showing eligibility for the credit and substantiation for the calculation of the ERC.

Review your eligibility with your trusted tax or financial advisor and be wary of any company that contacts you suggesting that you could be due a large sum of money. Do not rely on a third party to calculate your eligibility, file your claim or maintain records of your claim, unless that third party is a trusted tax advisor. Even then, according to the IRS, “Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.”

According to IRS Notice 2021-20, records that are needed to prove an ERC claim in case of an audit include:

  • A copy of the ERC calculation and paid sick and family leave for eligible quarters.
  • A listing of employees, dates and amounts for those who were paid sick and family leave and were eligible for the ERC.
  • Copies of required paid sick and family leave statements provided by employees for the requested leave, written support and a statement that the employees are unable to work for the COVID-19-related reason.
  • Copies of documentation to show how qualified health plan expenses were allocated to wages.
  • Copies of PPP Loan Forgiveness Applications and forgiveness letters.
  • Documentation that operations were fully or partially suspended due to governmental orders.
  • Copies of income tax returns, employment tax returns and W-2s for related entities if the taxpayer is part of an aggregated group; and
  • Copies of W-2s, Form 941s and Form 941-X filings.

CDA’s practice management and employment experts have received several calls from dentists who have questions regarding their ERC eligibility. While CDA’s experts can provide guidance across many aspects of the business side of practice, they are not able to provide tax advice, nor has CDA endorsed any third-party companies offering ERC filing services. Dentists are advised to consult with a trusted CPA, tax professional or financial advisor before taking the credit.

Examples of predatory marketing for the ERC

Here are just a few examples of the misinformation predatory businesses have used to market their services to dentists.

Misinformation: Being affected by COVID-19 qualifies your practice for ERTC.

Reality: This is an overgeneralization. Revenue decline and “more than nominal” impacts on business are the two COVID-19-related consequences that could lead toward ERC eligibility. It’s widely believed that any COVID-19-related complications qualify a business for the ERC, when in truth you must show that a specific COVID-19-related federal, state or local government order or mandate caused the impact to your business. Merely adjusting your operations in response to the pandemic is not enough to qualify for the ERC.

California dentists should understand that Gov. Gavin Newsom’s 2020 order to “shelter in place” did not require dentists to close their offices during COVID-19 but to assist with flattening the disease curve by postponing elective care and procedures. The California Department of Public Health’s orders — except within a few counties — did not require dental practices to close. Some dentists have confused CDA and ADA recommendations to voluntarily suspend nonurgent or nonemergency care in response to COVID-19 with government mandates.

As clarified in IRS Notice 2021-20, a qualifying order must “limit commerce, travel or group meetings” (for commercial, social, religious or other purposes) due to COVID-19. The order must come from a government entity that has jurisdiction over the employer’s operations, (not a professional organization like CDA) and the order must also have a more than a nominal impact on the business’s operations.

Misinformation: You get $26,000 for each employee.

Reality: Calculating the eligible ERC amount is quite complicated. Dentists and their tax advisors should exercise extreme caution when claiming credit. Don’t assume that you can multiply how many employees you have times $26,000 and claim that total on the ERC form. Three major factors impact the potential ERC amount: wages paid, duration of impact and other incentives already claimed.

Another note of caution: In most cases, the statute of limitations for auditing ERC claims is five years. Those who receive ERC are required to amend prior tax filings and add to past income the amount of their credit since the IRS does not allow both a tax deduction and a tax credit on the same wages paid. If the IRS audits your ERC claim during years four or five within the statute of limitations, you could be doubly penalized if you wrongfully claimed ERC.

Report predatory marketing schemes

You can help the IRS track down third parties attempting to fraudulently file ERC claims on behalf of unsuspecting dentists. If you’ve been contacted by one, the IRS encourages you to file a report. Submit by fax or mail a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations.

Employers should also report instances of fraud and IRS-related phishing attempts to the IRS and Treasury Inspector General for Tax Administration at 800.366.4484.

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