If your social media feed looks like mine, you’ve undoubtedly seen dozens (maybe hundreds) of advertisements from a myriad of companies saying things like, “Attention Business Owners: Earn Up to $26,000 Back Per Employee No Fees or Costs Unless We Recover Money!” If you happen to be like me, your first thought was probably, “well, that sure sounds like a scam!” As a small business owner with both an educational and professional background in accounting/finance (i.e., among other former/current credentials, I have undergraduate degrees in Economics and Finance, an M.B.A. with an emphasis in finance, and worked as a fraud investigator at Ernst & Young after graduating business school), I began independently researching the Employee Retention Tax Credit program.
Afterall, IF it wasn’t a scam, what small business owner (or any business owner, for that matter) wouldn’t want to get a free $26,000 from the U.S. Government?! As a result of my research, I learned two very important things.
As it turns out, some things that seem too good to be true—are actually true! Let me explain. As the COVID-19 pandemic drew on with no realistic end in sight, companies began laying off workers by the millions. Not surprisingly, governments at every level—federal, state, county, and local—began to become extremely concerned that, if that trend continued, the U.S. would almost certainly be thrust into an economic crisis, the likes of which it had not seen since the Great Depression. In an effort to stave off (or avoid altogether) these foreboding cataclysmic financial consequences, the federal government passed a number of COVID-19 relief bills, one of which was (and remains) known as the CARES Act.
The CARES Act contained literally hundreds of financial incentives targeting big businesses, small businesses, and even individual taxpayers. Regardless of who was targeted, all the CARES Act’s provisions were designed with one objective in mind—boosting the American economy long enough that we could find our way to the other side of the pandemic. One such provision was predominantly focused on encouraging, in particular, small businesses to keep their employees on the payroll for as long as financially feasible. That provision was named the “Employee Retention Tax Credit.”
In general, most businesses qualify for at least a partial ERTC refund if the business either experienced:
1) a partial or complete government shutdown that limited “commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID-19),” and the shutdown resulted in the suspension of some or all portions of your business’ operations. See IRS Notice 2021-20, pp. 24-27; or
2) a decrease in “gross receipts” (i.e., gross revenue) of 50% (in 2020) or 20% (in 2021) from the same quarter of 2019 (e.g., 1st Quarter 2020/2021 vs. 1st Quarter 2019).
While this article is not designed to be a “how to” guide on requesting an ERTC refund, in simple terms, it is possible for many businesses to qualify for up to a $26,000/employee refund.
If you think your business may qualify for a partial or complete ERTC refund, you (or your tax professional) will need to file an amended IRS Form 941 (known as IRS Form 941-X) for each quarter that you believe your business would be entitled to the credit. In essence, businesses with W-2 employees are required to file a quarterly IRS Form 941. Businesses that were “in the know” about the ERTC, which weren’t many, would have requested their ERTC refund on their original IRS Form 941 filings in the form of reduced current and future employment taxes that would be owed by the company. However, for majority of us who were unaware of the ERTC until after filing our businesses’ original IRS Form 941s, it is still possible to amend the previous quarterly filings by virtue of IRS Form 941-X.
The deadline for amending your business’ previously submitted IRS Form 941s is three (3) years from the due date of each quarter’s original IRS Form 941. Your business had until the end of the next quarter to file its original Form 941. Thus, by way of example, for the 2nd Quarter 2020, you would have until the end of the 3rd Quarter 2023 to file an IRS Form 941-X seeking a partial or complete ERTC refund for that quarter. As popular as this tax credit has become, you may be wondering, “why hasn’t my accountant mentioned anything?” That’s a great question, and while I cannot give a definitive answer, I can tell you that my firm faced the same problem—that is, our accountant never even mentioned the ERTC, and quarter-by-quarter, just continued to file the firm’s IRS Form 941s as if we weren’t eligible for the refund even though we were.
Like many of you, I discovered the credit either by articles such as this one or via social media advertisements. However, even with my extensive financial/accounting background, when I began the process of completing an IRS Form 941-X for each qualifying quarter, I found the process challenging. In fact, it was so challenging that I purchased an online seminar designed for CPAs that was focused on how to go about completing/filing the amended form. It frequently takes between six (6) weeks to six (6) months for the IRS to process/review each IRS Form 941-X and send your business a refund check. While I am quite confident in my math and submitted paperwork, I cannot definitively (i.e., 100%) guarantee that I correctly completed the firm’s IRS Form 941-Xs.
This is where we begin to get into the crux of the problem with the companies you may be seeing on social media. Despite my financial/accounting background, even I was tempted to give them a call. I don’t imagine that many business owners would be willing to invest the time, energy, and uncertainty of trying to file “pro se” numerous IRS Form 941s. Thus, nobody could blame any small business owner for having reached out to one of the hundreds of companies that are aggressively advertising their expertise on the subject and offering their assistance in obtaining ERTC refunds. I simply figured that I was better off paying a percentage of my firm’s ERTC refund to someone else (and actually request it), as opposed to failing to request the refund, and getting nothing!
Unfortunately, these companies are fully aware that, even the most sophisticated of business owners, is completely dumbfounded as to go about obtaining their business’ ERTC refund. Like me, you are probably asking yourself, “how do these companies make money?” Well, let’s start with how a CPA (who was actually doing his or her job) would charge your business for preparing/filing amended quarterly IRS Form 941s. A CPA would either bill you a flat fee, or alternatively, on an hourly basis for the time expended preparing/submitting the forms. On the flip side of the coin, I have researched well over 100 of the companies advertising their ERTC expertise on social media, and without exception, they charge companies a contingency fee for any ERTC refund that is ultimately received by the business.
When companies (typically law firms) charge a contingency fee, they take a percentage of a client’s total recovery. Contingency fees are very common in the legal field, and with a couple of exceptions for criminal and family law matters, are perfectly legal (as long as the percentage charged is deemed reasonable). In fact, according to many courts, lawyers in unique fields (such as employment or civil rights law) are even encouraged to charge contingency fees, as the potential for a large legal fee encourages lawyers to take and invest in very difficult and time-consuming cases. Without the prospects of higher recoveries in such cases, it is presumed that very few lawyers would be interested in pursuing certain types of cases which would result in large amounts of potential clients being unable to obtain qualified legal counsel.
While lawyers’ contingency fee percentages can and do vary, they are frequently in the range of 33.33% to 50% of the client’s gross recovery on a case. Based on my research into the ERTC companies that are advertising on social media, their contingency fee percentages appear to vary from 15% (in a couple instances) to as high as 60%, with an average contingency fee percentage of around 30-40% of gross ERTC refund recovery. So, you are probably wondering, “what’s the problem with companies charging a contingency fee on ERTC refunds?” That’s a great question that I will answer as the next thing I learned through my ERTC research…
Unethical and ILLEGAL for Everyone
While the ERTC program is not a scam, charging a contingency fee on any ERTC refund obtained for a client is unlawful under the U.S. Department of Treasury’s regulations governing the receipt of compensation in exchange for assisting a taxpayer with the filing of any original or amended tax return or claim for refund. See Treasury Department Circular No. 230. For Certified Public Accountants (“CPAs”), charging a contingency fee for obtaining ERTC refunds is also unethical under the Association of International Certified Professional Accountants (the “ÁICPA”)’s Code of Professional Conduct.
In fact, the IRS has become so enraged by the common, yet illegal, practice of companies’ charging contingency fees on ERTC refunds, that the IRS has explicitly requested the public’s help in shutting the process down. That is, the IRS has requested the public to report any such companies by completing IRS Form 14242 (for promoters of contingency fee billing) or IRS Form 3949-A (to report outright scams). Contingency fees aside, it has been brought to light by the IRS that many, if not most, of the offending companies, are also employing unqualified personnel to complete companies’ IRS Form 941-Xs. As it turns out, this practice is ALSO ILLEGAL under U.S. Department of Treasury regulations. See Treasure Department Circular No. 230.
IF YOUR COMPANY WAS EITHER UNLAWFULLY
CHARGED A CONTINGENCY FEE ON AN ERTC REFUND
THAT YOUR COMPANY HAS ALREADY RECEIVED…
YOU BELIEVE YOUR COMPANY’S IRS FORM 941-Xs WERE COMPLETED AND/OR FILED BY AN UNLICENSED PREPARER…
CALL HOLLINGSHEAD & DUDLEY TODAY FOR A FREE CONSULTATION ABOUT YOUR COMPANY’S LEGAL
OPTIONS FOR SEEKING A PARTIAL OR COMPLETE
REFUND OF FEES PAID TO THE ERTC COMPANY