IRS Shares Five More Warning Signs of Incorrect ERC Claims
IRS compliance teams are stepping up work on analyzing and processing Employee Retention Credit (ERC) claims and have issued five new warning signs of incorrect claims that are being commonly seen. These five new problem areas are in addition to the seven warning signs previously released.
As a reminder, the ERC, a pandemic-era credit, was meant to help small businesses, but corrupt promotors deceived many businesses and misled them about the qualifications needed to claim the credit. The IRS is now intensifying its review of such claims and advises businesses with pending claims to carefully review their filings to verify eligibility. If a business’ claim includes any of these warning signs, they should speak to a tax professional or consider using the special ERC withdrawal program. If a business already has an approved claim, they should still review their filing as the IRS is stepping up its compliance efforts, which could lead to future issues such as audits, penalties, and interest.
The five new warning signs of incorrect ERC claims are:
Claims for essential businesses during the pandemic that were fully operational and didn’t have a decline in gross receipts. Essential businesses are generally not eligible for the ERC because they do not have their operations fully or partially suspended by government orders.
The business is unable to show how a government order fully or partially suspended its operations. Many businesses have not been able to provide enough proof of this.
A business reporting a family member’s wages as qualified wages. Claims for wages to related individuals usually end up being for the wrong amount or completely ineligible. Wages paid to related individuals generally do not qualify for the ERC (related individuals are defined as the majority owner and their spouse, child, sibling, parent, step-family, niece/nephew, aunt/uncle, close in-law, or household member).
Using wages that were already used for Paycheck Protection Program (PPP) loan forgiveness. If the Small Business Administration forgave a PPP loan (which helped businesses keep their workers employed during the pandemic), businesses cannot claim the ERC on the same wages they reported as payroll costs to get PPP loan forgiveness. Payroll costs up to the amount forgiven are ineligible for the ERC.
Large businesses claim wages for employees who provide services. Large employers have to follow special rules when claiming the ERC, such as they can only claim wages for employees who were not providing services during the periods applied for.
The IRS anticipates announcing more information about ERC claims soon, including new steps to combat improper claims, new compliance work on high-risk ERC claims, a potential short-term reopening of the Voluntary Disclosure Program, and updates about processing low-risk payments to small businesses with legitimate claims. The IRS previously announced that more claims with the highest risk were being denied.
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