Beware: some unscrupulous promoters have misrepresented eligibility rules for the Employee Retention Credit, luring well-intentioned businesses to claim the credit when they don’t qualify. The IRS is highlighting seven suspicious signs and urging businesses to seek a trusted tax professional to resolve an incorrect claim if they need to.

ERC Compliance

With ERC compliance work expanding, the IRS reminds businesses to quickly pursue the claim withdrawal process if they need to ask the IRS not to process an ERC claim for any tax period that hasn’t been paid yet, according to a news release.

Signs an ERC Claim Could be Incorrect

These seven suspicious signs could indicate an incorrect claim:

  • Too many quarters claimed. Some promoters urged employers to claim the ERC for all quarters that the credit was available. Qualifying for all quarters is uncommon. Employers should carefully review their eligibility for each quarter.
  • Government orders that don’t qualify. Some promoters told employers they could 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. Some promoters also suggested that an employer qualifies based on communications from the Occupational Safety and Health Administration. This is generally not true. Employers should review the frequently asked questions about ERC – Qualifying government orders for more information and helpful examples for these topics.
  • Too many employees and wrong calculations. Employers should be cautious about claiming the ERC for all wages paid to every employee on their payroll. Employers need to meet certain rules for wages to be considered qualified wages, depending on the tax period. Employers should review all calculations to avoid overclaiming the credit. They should not use the same credit amount across multiple tax periods for each employee. For details on credit amounts, see the ERC 2020 vs 2021 comparison chart.
  • Supply chain issues. 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 disruptionsPDF.
  • Claims 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 keep payroll records that support their claim.
  • Didn’t pay wages or didn’t exist during the eligibility period. Employers can only claim ERC for tax periods when they pay wages to employees. Records available to the IRS show some businesses that claimed ERC didn’t have any employees or they claimed ERC for tax periods before the business existed. The promoter says there’s nothing to lose. Businesses should be on high alert with any ERC promoter who urges them to claim ERC because they “have nothing to lose.” Businesses that incorrectly claim the ERC risk repayment, penalties, interest, audio,t, and other expenses.

Checklist

The IRS has an interactive ERC Eligibility Checklist that tax professionals and taxpayers can use to check potential eligibility for ERC. It’s also available as a printable guide.

Source: IRS