As businesses continue to navigate the financial relief options made available during the COVID-19 pandemic, the IRS has recently issued a new set of warnings regarding incorrect claims for the Employee Retention Credit (ERC). This pandemic-era credit was designed to support businesses that kept employees on their payroll during government-mandated shutdowns or periods of significant decline in revenue. However, the IRS has identified common issues with ERC claims, often stemming from aggressive promotion and improper eligibility assumptions.

It is crucial for businesses to reassess their ERC claims to avoid audits, penalties, or repayment demands. If a business believes it has incorrectly claimed the ERC, the IRS encourages prompt action through its claim withdrawal program or the second ERC Voluntary Disclosure Program.

Five New Warning Signs of Incorrect ERC Claims

The IRS has outlined five new red flags that businesses should be aware of when reviewing their ERC claims:

1. Essential Businesses Fully Operational During the Pandemic
   Many essential businesses, particularly those that were able to continue full operations during the pandemic, have been misled into claiming the ERC. In most cases, essential businesses that did not experience full or partial suspension due to a government order are not eligible for the credit. The IRS has noted that promoters aggressively marketed the ERC to such businesses, despite their ineligibility.
2. Inability to Support Business Suspension by Government Orders
   Eligibility for the ERC requires that a business was fully or partially suspended by a qualifying government order. Some businesses have struggled to provide sufficient documentation to prove how these orders affected a substantial portion of their operations. Without this evidence, claims may be deemed incorrect.
3. Wages Paid to Family Members Reported as Qualified Wages
   Some business owners have incorrectly claimed the ERC using wages paid to related individuals, such as family members. Claims based on these wages are often inaccurate or completely ineligible for the credit, leading to potential errors in the amount claimed.
4. Double-Counting Wages for Paycheck Protection Program (PPP) Loan Forgiveness
   The ERC cannot be claimed on wages that were already reported as payroll costs for PPP loan forgiveness. Businesses that mistakenly claimed the same wages for both programs risk having their ERC claims flagged and disqualified by the IRS.
5. Large Employers Incorrectly Reporting Wages for Employees Providing Services
   Large eligible employers may only claim the ERC for wages paid to employees who were not performing services during the eligible periods. However, many large businesses have erroneously included wages for employees who continued to provide services, resulting in ineligible claims.

Previously Identified Warning Signs

In addition to these new red flags, the IRS has previously warned about seven other areas where businesses may be incorrectly claiming the ERC:

• Too many quarters claimed: Businesses claimed the ERC for more periods than allowed.
• Non-qualifying government orders: Claims based on government orders that do not meet the qualification criteria.
• Incorrect employee counts and calculations: Misreporting the number of employees and making calculation errors.
• Supply chain disruptions: Some businesses improperly cited supply chain issues as grounds for claiming the ERC.
• Excessive tax periods claimed: ERC claims extended beyond the eligible tax period.
• No wages paid or business didn’t exist: Businesses that did not pay wages or were not in operation during the eligibility period.
• Promoters saying ‘there’s nothing to lose’: Promoters claiming businesses should apply for the ERC without understanding the eligibility requirements.

Protecting Your Business

To ensure compliance and avoid penalties, the IRS recommends that businesses consult a trusted tax professional and use the available resources to verify their eligibility. The IRS provides tools such as the ERC Eligibility Checklist and Frequently Asked Questions (FAQs) to help businesses identify whether their claims are correct. Businesses should be cautious of promoters promising easy approval or guaranteed eligibility without properly evaluating the legal requirements.

What to Do If You’ve Made an Incorrect Claim

Businesses that suspect they have incorrectly claimed the ERC should act quickly to address the issue. The IRS offers a claim withdrawal program and a second ERC Voluntary Disclosure Program, which provide an opportunity for businesses to correct mistakes and avoid audits or penalties.

By taking proactive steps and reviewing your filings, you can protect your business from the potential financial and legal consequences of an incorrect ERC claim. If you need help assessing your eligibility or fixing past errors, we are here to assist you in navigating the process and ensuring compliance with IRS guidelines.