IRS Releases Five New Warning Signs for Incorrect Employee Retention Credit (ERC) Claims
On July 26, 2024, the IRS, in its unwavering commitment to fairness and accuracy in the tax system, added five more red flags of incorrect Employee Retention Credit (ERC) claims for businesses and tax professionals. The new warning signs come from common issues the IRS compliance team has seen while analyzing and processing the ERC claims.
In this blog, you will understand the new release warning signs for incorrect claims for the ERC. By being aware of and proactive in addressing these warning signs, businesses can ensure they are not making incorrect claims for the ERC.
Five New Warning Signs of Incorrect ERC Claims
IRS compliance teams have identified five additional warning signs in ERC claims. Here are five more red flags.
Essential businesses during the pandemic that could fully operate and didn’t have a decline in gross receipts
Some promoters convinced essential businesses to claim the ERC when, in many instances, they weren’t eligible because their operations weren’t fully or partially suspended by a qualifying government order.
Businesses unable to prove how a government order fully or partially suspends business operations
The IRS requires businesses to prove how a government order fully or partially suspends their operations. Many businesses fail to provide adequate information. Remember, eligibility depends on your specific situation, and you need to clearly demonstrate how more than a nominal portion of your operations were affected.
Businesses reporting family members’ wages as qualified wages
Claiming wages paid to related individuals as part of your ERC can lead to ineligible claims. These wages are not considered qualified wages for ERC purposes. Related individuals include:
- Spouses
- Children or their descendants
- Siblings or step-siblings
- Parents or their ancestors
- Stepparents
- Nieces or nephews
- Aunts or uncles
- In-laws
- Household members sharing your principal place of abode
Ensuring that you do not include these wages is essential to avoid incorrect claims.
Businesses using wages already used for Paycheck Protection Program loan forgiveness
The Paycheck Protection Program (PPP) helped many businesses during the pandemic, but it comes with a caveat for ERC claims. If your PPP loan was forgiven, you cannot use the same wages to claim the ERC. Any payroll costs used to get PPP forgiveness are not eligible for ERC. Only the remaining qualified wages can be used to calculate the credit.
Large employers claiming wages for employees who have provided services
Large employers face specific rules when it comes to claiming the Employee Retention Credit (ERC). Here’s what you need to know:
For large employers:
- If you had more than 100 full-time employees in 2019, special rules apply to your 2020 ERC claims.
- If you had more than 500 full-time employees in 2019, these rules apply to your 2021 ERC claims.
The key rule is that large employers can only claim the ERC for wages paid to employees who were not providing services. This means that if your employees were still working during the periods in question, their wages are not eligible for the ERC. Unfortunately, many large employers have made the mistake of including these wages in their claims, leading to incorrect filings.
Existing Signs of Incorrect ERC Claims
Remember the previously shared signs of incorrect ERC claims:
- Too many quarters are being claimed
- Don’t qualify for government quarters
- Too many employees and wrong calculations
- Businesses citing supply chain issues
- Businesses claiming ERC for too much tax period
- Businesses didn’t pay wages or didn’t exist during the eligibility period
- Promoters say there’s nothing to use.
Click here to learn more about the warning signs previously shared by the IRS.
What Should You do to resolve the incorrect ERC claims?
The IRS has provided some options to help businesses resolve incorrect ERC claims:
- Claim Withdrawal: Since the number of unquestionable claims were identified. In this case, the IRS recommends ineligible businesses consider the ERC withdrawal program in order to avoid future compliance issues.
- Amending a return: Businesses that overclaimed ERC can amend their returns to correct the amount claimed
- Voluntary Disclosure Program: The IRS is in the process of reopening the Voluntary Disclosure Program for a certain period. Additional details regarding this program will be announced shortly.
Bottom line
As a business, it is important to follow IRS guidelines and stay informed about new releases. This can help you recognize errors and incorrect tax filings. Understanding these common errors can minimize the risk of penalties from the IRS.
It’s crucial to select the right tax preparer, adhere to IRS updates, and maintain accuracy. The IRS always recommends reviewing with the help of reputable tax professionals. By doing so, you can avoid incorrect filing of ERC claims and stay clear of IRS penalties.
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