With a key March 22, 2024 deadline quickly approaching, the IRS highlighted special warning signs to help small businesses that may need to resolve incorrect or questionable Employee Retention Credit (ERC) claims.
The agency alerted businesses about seven suspicious warning signs that could signal future IRS problems involving ERC claims. The indicators, built on feedback from the tax professional community and IRS compliance personnel, center on misinformation some unscrupulous ERC promoters used. Many of these groups urged taxpayers to ignore advice from trusted tax professionals and claim the pandemic-era credit even though they may not qualify.
The alert comes as the March deadline approaches for the ERC Voluntary Disclosure Program for anyone that filed a claim in error and received a payment; the disclosure program allows businesses to repay just 80% of the claim. Taxpayers who filed a claim previously that hasn’t been processed should also review the guidelines and quickly pursue the claim withdrawal process if they now see their claim is ineligible.
Seven suspicious signs
Here are some of the common red flags being seen on ERC claims that the IRS is focusing on:
- Too many quarters being claimed. Some promoters have urged employers to claim the ERC for all quarters that the credit was available. Qualifying for all quarters is uncommon, and this could be a sign of an incorrect claim. Employers should carefully review their eligibility for each quarter.
- Government orders that don’t qualify. Some promoters have told employers they can claim the ERC if any government order was in place in their area, even if their operations weren’t affected or if they chose to suspend their business operations voluntarily. This is false. To claim the ERC under government order rules:
- Government orders must have been in effect and the employer’s operations must have been fully or partially suspended by the government order during the period for which they’re claiming the credit.
- The government order must be due to the COVID-19 pandemic.
- The order must be a government order, not guidance, a recommendation or a statement.
The frequently asked questions about ERC – Qualifying Government Orders section of IRS.gov has helpful examples. Employers should make sure they have documentation of the government order related to COVID-19 and how and when it suspended their operations. Employers should avoid a promoter that supplies a generic narrative about a government order.
- Too many employees and wrong calculations. Employers should be cautious about claiming the ERC for all wages paid to every employee on their payroll. The law changed throughout 2020 and 2021. There are dollar limits and varying credit amounts, and employers need to meet certain rules for wages to be considered qualified wages, depending on the tax period. For details about credit amounts, see the Employee Retention Credit – 2020 vs 2021 Comparison Chart.
- Business citing supply chain issues. Qualifying for ERC based on a supply chain disruption is very uncommon. A supply chain disruption by itself doesn’t qualify an employer for ERC. An employer needs to ensure that their supplier’s government order meets the requirements. Employers should carefully review the rules on supply chain issues and examples in the 2023 legal memo on supply chain disruptions.
- Business claiming ERC for too much of a tax period. It’s possible, but uncommon, for an employer to qualify for ERC for the entire calendar quarter if their business operations were fully or partially suspended due to a government order during a portion of a calendar quarter. A business in this situation can claim ERC only for wages paid during the suspension period, not the whole quarter. Businesses should check their claim for overstated qualifying wages and should keep payroll records that support their claim.
- Business didn’t pay wages or didn’t exist during eligibility period. Employers can only claim ERC for tax periods when they paid wages to employees.
- Promoter says there’s nothing to lose. Businesses should be on high alert with any ERC promoter who urged them to claim ERC because they “have nothing to lose.” Businesses that incorrectly claim the ERC risk repayment requirements, penalties, interest, audit and potential expenses of hiring someone to help resolve the incorrect claim, amend previous returns or represent them in an audit.
Resolving incorrect ERC claims
Businesses that are not eligible for ERC but have received it – as a check that’s been cashed or deposited, or in the form of a credit applied to a tax period – may be able to participate in the IRS’s ERC Voluntary Disclosure Program. The special program runs through March 22, 2024, and allows eligible participants to repay their incorrect ERC, minus 20%.
If a taxpayer’s ERC is incorrect and is paid after Dec. 21, 2023, they aren’t eligible for the ERC VDP. They should not cash or deposit their check. They can withdraw the claim, return the check and avoid penalties and interest.
The withdrawal option lets certain employers withdraw their ERC submission and avoid future repayment, interest and penalties. Businesses can use this option if they haven’t received the payment, or they’ve received a check but haven’t deposited or cashed it. If a taxpayer’s withdrawal request is accepted, the IRS will treat the claim as though it was never filed.