Seven Warning Signs of Incorrect ERC Claims
In February, the IRS released a list of seven suspicious signs that a company’s Employee Retention Credit (ERC) claim may be questionable or incorrect, which could cause future problems with the IRS. Small businesses should carefully review these warning signs to determine if their claims must be resolved. The ERC, a pandemic-era credit, was meant to help small businesses, but corrupt promotors have deceived many businesses and misled them about the qualifications needed to claim the credit.
A deadline of March 22, 2024, has been set for the ERC Voluntary Disclosure Program, which allows businesses that filed a claim in error and received payment to repay just 80% of their claim. In addition, taxpayers who filed ineligible allegations that have not yet been processed should review the guidelines and start the claim withdrawal process. Resolving an incorrect claim through these special programs will help businesses avoid penalties and interest.
The ERC has very complex qualifications and eligibility rules, so the IRS is urging businesses to review some common red flags regarding claims:
Too many quarters are claimed. Companies attempting to claim the credit should be looking at each quarter’s eligibility. Claiming the ERC for every quarter that the credit is available is a red flag because qualifying for every single quarter is very uncommon.
Government orders that don’t qualify. The ERC has very specific rules for claiming credit due to government orders. Some promoters may tell companies that any government order counts, but they do not – the order (not guidance, recommendation or statement) must be due to the COVID-19 pandemic, in effect, and cause the company’s operations to be fully or partially suspended during the claimed quarter.
Incorrect calculations and too many employees. As laws changed during 2020 and 2021, so did the calculations for the credit and what was considered a “qualified wage.”
Supply chain issues. Supply chain disruptions alone do not qualify a business for the ERC, and successful claims that rely on such disruptions, in addition to other factors, are uncommon.
ERC claimed for too much of a tax period. While it is possible for an employer to qualify for the ERC for an entire quarter if their business was suspended in part or full due to government order during only a portion of that quarter, it is not common. Businesses should take care to not overstate their qualifying wage and look at the wages paid only during the period of suspension.
A business didn’t pay wages or didn’t exist during the eligibility period. It may seem obvious, but a business cannot claim the ERC for periods when they did not pay wages to employees, didn’t have employees, or didn’t even exist.
Promoters urge businesses to take the credit because there’s “nothing to lose.” Businesses do, in fact, have something to lose by wrongly or inaccurately claiming the ERC, namely the risk of repayment, penalties, interest, audit, and future expenses of resolving the claim.
Again, businesses that incorrectly received the ERC through an ineligible claim (either by check or a tax credit) have, through March 22, to participate in the Voluntary Disclosure Program. If the credit was paid after December 31, 2023, those claims are not eligible for the Voluntary Disclosure Program. Businesses should not cash or deposit those checks, but rather withdraw the claim and return the check, avoiding penalties and interest. Claim submission withdrawal is also available to those without a payment yet. If a withdrawal request is accepted, the IRS will treat the claim as never filed.
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