Check business tax returns for signs of incorrect Employee Retention Credit claims
The IRS has raised concerns about some promoters misrepresenting the eligibility criteria for the Employee Retention Credit (ERC), leading businesses to incorrectly claim the credit.
To address this issue, the IRS has identified seven suspicious signs that could indicate an incorrect ERC claim and is urging businesses to consult with trusted tax professionals to rectify any erroneous claims.
Signs an ERC claim could be incorrect
Too many quarters claimed
Promoters may encourage businesses to claim the ERC for all available quarters, but it is uncommon for businesses to qualify for every quarter.
Employers should meticulously review their eligibility for each quarter before making a claim.
Government orders that don’t qualify
Misleading promoters have suggested that any local government order allows a business to claim the ERC, even if the business operations were unaffected or voluntarily suspended.
This is incorrect.
Claims based on Occupational Safety and Health Administration (OSHA) communications are also generally invalid.
Businesses should refer to the IRS's frequently asked questions about qualifying government orders for accurate guidance.
Too many employees and wrong calculations
Businesses should not claim the ERC for all wages paid to every employee indiscriminately.
Qualified wages must meet specific criteria depending on the tax period. Employers must review all calculations to avoid overclaiming the credit and should not apply the same credit amount across multiple tax periods.
Refer to the IRS's ERC 2020 vs 2021 comparison chart for detailed information on credit amounts.
Supply chain issues
A disruption in the supply chain alone does not qualify a business for the ERC.
Employers must ensure that their supplier’s government order meets the required conditions.
Review the rules on supply chain issues and the examples provided in the 2023 legal memo on supply chain disruptions.
Claims for too much of a tax period
It is unusual for a business to qualify for the ERC for an entire calendar quarter unless their operations were fully or partially suspended due to a government order during that period.
Claims should only cover wages paid during the actual suspension period, not the entire quarter.
Businesses need to verify their claims for overstated wages and maintain supporting payroll records.
Didn’t pay wages or didn’t exist during eligibility period
The ERC can only be claimed for tax periods when wages were actually paid to employees.
Some businesses incorrectly claimed the ERC for periods when they had no employees or for periods before the business was established.
Accurate records must reflect wage payments during the eligibility period.
Promoter says there’s nothing to lose
Be wary of promoters who suggest claiming the ERC because "there’s nothing to lose." Incorrect claims can lead to repayment, penalties, interest, audits, and other expenses.
Businesses should be cautious and ensure claims are legitimate to avoid these risks.
IRS resources for ERC claims
The IRS offers an interactive ERC Eligibility Checklist that both tax professionals and taxpayers can use to assess potential eligibility for the ERC.
This tool helps ensure claims are valid and compliant with IRS guidelines.
For more detailed information, businesses are encouraged to consult the IRS website or seek advice from trusted tax professionals to navigate the complexities of ERC claims correctly.