As the IRS intensifies work on the Employee Retention Credit (ERC), they shared five new warning signs being seen on incorrect claims by businesses. The new items are in addition to seven problem areas the IRS previously highlighted.
The IRS urged businesses with pending claims to carefully review their filings to confirm their eligibility and ensure credits claimed don’t include any of these 12 warning signs or other mistakes. Businesses with these indicators should talk to a trusted tax professional and consider using special ERC Withdrawal Program that remains available. Businesses considering applying for the complex credit also should follow the same steps before submitting a claim.
The IRS issued the five new warning signs to give businesses and tax professionals additional time to prepare for an upcoming announcement involving new steps being taken to counter improper ERC claims. In coming days, the IRS plans to issue more information on new compliance work involving high-risk ERC claims as well as details about an anticipated short-term reopening of the Voluntary Disclosure Program and an important update about impending processing of low-risk payments to help small business with legitimate claims. This follows up on last month’s announcement that the IRS was denying more of the highest-risk ERC claims.
The agency is also scrutinizing hundreds of thousands more claims that show risk of being incorrect as well as beginning additional processing of low-risk claims to those with eligible claims.
As the IRS begins to process additional lower-risk claims, the agency reminds businesses that they may receive payments for some valid tax periods – generally quarters – while the IRS reviews other periods for eligibility. The IRS emphasizes ERC eligibility can vary from one tax period to another if, for example, government orders were no longer in place or a business’s gross receipts increased. Alternately, qualified wages may vary due to a forgiven PPP loan or because an employer already claimed the maximum amount of qualified wages in an earlier tax period.
Five newly announced signs of an incorrect ERC claim
IRS compliance teams have identified these additional five common signs that have been a recurring theme seen on ERC claims. None of these qualify under the rules passed by Congress. The new red flags cover these areas:
- Essential businesses during the pandemic that could fully operate and didn’t have a decline in gross receipts.
- Business unable to support how a government order fully or partially suspended business operations.
- Business reporting family members’ wages as qualified wages.
- Business using wages already used for Paycheck Protection Program loan forgiveness.
- Large employers claiming wages for employees who provided services.
Claim withdrawal: Given the large number of questionable claims identified in the recent review, the IRS continues to urge ineligible businesses with unprocessed claims to consider the ERC Withdrawal Program to avoid future compliance issues. The IRS will treat the claim as though the taxpayer never filed it. No interest or penalties will apply.
Amending a return: Businesses that overclaimed the ERC can amend their returns to correct the amount of their claim.
Voluntary Disclosure Program: The IRS is in the final stages of reopening the ERC Voluntary Disclosure Program for a brief period. Additional details are expected to be available shortly.
NOTE: This topic is included in the Back to Basics Business Issues Update and Review seminar.