The landscape of Employee Retention Credit (ERC) claims is changing rapidly, and salon owners need to stay informed. On June 20, 2024, the Internal Revenue Service (IRS) announced a significant crackdown on ERC claims. This move directly impacts many in the beauty industry who have relied on this credit during challenging times.

The IRS has revealed that it will deny tens of thousands of high-risk ERC claims, representing billions of dollars in potentially improper filings. This decision comes after a detailed review process that has identified between 10 and 20 percent of claims as the highest risk. These claims will be denied outright, while an additional 60 to 70 percent of claims showing risk indicators will undergo further analysis.

The processing moratorium on new claims submitted after September 14, 2023, remains in effect. The IRS is still processing low-risk ERC claims received before the September 14, 2023 moratorium. Unfortunately, the IRS is only processing approximately 1,000 - 2,000 returns per week, with a backlog of nearly 1,500,000 filings. Some payments from processing these claims are expected to be issued later this summer. This development offers a glimmer of hope for salon and spa owners who have been waiting patiently for their legitimate claims to be processed.

This latest announcement underscores the importance of ensuring previously filed ERC claims meet all eligibility criteria and are adequately documented. IRS Commissioner Danny Werfel states, “[p]eople may think they are on safe ground, but many are simply not eligible under the law. The IRS continues to urge those with pending claims to use this period to review the guideline checklist on IRS.gov, talk to a legitimate tax professional rather than a promoter, and use the special IRS withdrawal program when there’s an issue.” IR-2024-169 (Jun. 20, 2024).

The withdrawal program allows taxpayers to withdraw unprocessed claims without penalties or interest, avoiding future compliance issues. Businesses that have not received their ERC payment yet or have received a check but have not cashed or deposited it can return it and withdraw their claim.

Salon owners should prepare for increased IRS scrutiny of ERC claims and possible audits of their ERC claims. To ensure a secure and guided process, salon and spa owners who want to claim ERC should consult a trusted tax professional who is experienced in handling ERC claims. This professional guidance will protect you from promoters and unscrupulous tax preparers who may use this latest update to lure businesses into filing dubious claims. Warning signs that you may have been targeted by an ERC promoter include:

Percentage-Based Fees:

Fees should not be based on the size of a refund, as such conduct is expressly prohibited under Circular 230 (Regulations Governing Practice Before the Internal Revenue Service). 

Engagement Agreement Indemnification Provisions:

Some ERC promoters will include disclosures in their engagement agreements in an attempt to indemnify themselves from liability. For example, a disclosure such as: “ERC Preparer does not provide tax advice, tax filings, or CPA services. ERC Preparer is not a tax preparer or accountant and therefore disclaims any responsibility for the preparation of a client's federal or state tax returns” may be included, even if that ERC Preparer is the one who convinced you that you are eligible, and is the one who prepared your ERC claims for payment.

Offers to Determine Eligiblity in Minutes:

Statements like "ERC eligibility determined within minutes" are as unrealistic as transforming dark hair into platinum blonde perfection in just one sitting. Legitimate ERC claims take time and proper evaluation, often taking weeks or months to prepare and file such claims.

Refusal to Sign the Tax Return(s):

Just as a Salon’s transparency with its clients fosters trust and confidence, businesses should demand transparency from ERC preparers. If the ERC preparer refuses to sign returns or fails to provide identifying information, find a tax professional. Paid tax preparers are required to sign as the paid tax preparer. The IRS defines these preparers as ghost preparers and has been attempting to raise awareness of this issue through its Dirty Dozen Tax Scam Series.

Failure to Explain Eligibility Requirements:

ERC promoters may have failed to disclose crucial information, such as eligibility limitations, disallowed wages, and the interplay between ERC and the Paycheck Protection Program (PPP). It's crucial for salon and spa owners to be informed and knowledgeable about these requirements to avoid falling for erroneous advice.

Supply Chain Arguments:

Businesses are only eligible for ERC due to supply chain disruptions in rare circumstances. Ensure you understand the nuances to avoid falling for erroneous advice.

Unsolicited Calls and Advertisements:

If someone promises an "easy application process,” this should raise an eyebrow. ERC claims require careful consideration and documentation. It's important for salon and spa owners to be cautious and vigilant, as there is no “application.” ERC is a tax credit claimed on an employer's payroll tax return.

At Azarvand Tax Law, we're committed to helping business owners navigate these complex developments. Our team stays up-to-date with the latest IRS announcements and can help you understand what these changes mean for your business. Whether you need help reviewing an existing claim, evaluating eligibility for a new claim, considering the withdrawal program, or preparing for a potential or current ERC audit, we're here to assist. Refrain from letting this IRS development leave you feeling tangled. Contact Azarvand Tax Law at (410) 698-4005 or book a free consultation online at ERCAuditTaxAttorneys.com.