Executive Summary
The Internal Revenue Service (IRS) has recently issued a statement warning businesses about the common mistakes made when claiming the Employee Retention Credit (ERC). Unqualified claims are often due to misinformation from aggressive promoters, leading to a rise in ineligible applicants. The IRS encourages businesses to consult with a reliable tax professional to ensure they meet the ERC eligibility requirements and to avoid complications such as audits, penalties, and repayment. This article will explore the five new red flags identified by the IRS to help businesses steer clear of making incorrect ERC claims.
The Five New Red Flags in Employee Retention Credit Claims
The Internal Revenue Service (IRS), the US government agency responsible for tax collection and tax law enforcement, has recently issued a new set of warning signs to help businesses avoid making incorrect claims for the Employee Retention Credit (ERC). This comes in response to the prevalent issues the IRS has encountered while processing ERC claims.
The ERC was introduced as a response to the economic hardship caused by the COVID-19 pandemic. However, many businesses, swayed by aggressive promoters, have been making claims for this credit without being eligible. This has led the IRS to urge these businesses to meticulously review their filings and ensure their claims are valid and free from errors.
In order to avoid potential repercussions such as audits, penalties, repayments, and interest, businesses are advised to seek guidance from a trusted tax professional. The IRS also offers a claim withdrawal program and a second ERC Voluntary Disclosure Program to assist businesses in rectifying incorrect claims.
The IRS has identified five new areas of concern that businesses should be aware of while filing for the ERC:
1. Essential businesses that were fully operational during the pandemic and did not experience a decline in gross receipts should not be claiming the ERC. Many of these businesses were misguided by promoters into making these claims, despite not being eligible due to their operations not being significantly affected by a government order.
2. Businesses that cannot substantiate how a government order impacted their operations are also at risk. The IRS requires businesses to provide detailed information to confirm that their operations were substantially suspended due to a government order.
3. The IRS has noted instances where businesses reported wages paid to family members as qualified wages. Such claims are often incorrect or ineligible.
4. Businesses should refrain from claiming the ERC on wages that were reported as payroll costs for the Paycheck Protection Program (PPP) loan forgiveness.
5. Large employers are only eligible to claim wages for employees who were not providing services during the eligibility period. However, some large employers have included wages for employees who were providing services, leading to incorrect claims.
In addition to these new red flags, the IRS previously identified seven areas including claiming too many quarters, citing non-eligible government orders, incorrect employee calculations, supply chain issues, claiming the ERC for an extended tax period, and businesses that didn’t exist or didn’t pay wages during the eligibility period.
To help businesses navigate these potential pitfalls, the IRS has provided an ERC Eligibility Checklist and frequently asked questions about ERC eligibility. These resources can assist businesses in identifying and rectifying incorrect claims.
In summary, the IRS encourages businesses to be diligent and cautious while claiming the ERC. Consulting with a trusted tax professional and utilizing the resources provided by the IRS can help businesses avoid making incorrect claims and facing potential penalties.
For over 100 years, Packer Thomas has served generations of business owners, families, and others with tax, auditing, accounting, and information technology assistance. But we didn’t last that long by standing still. We’ve evolved to meet the needs of our clients who are also facing challenging changes in their financial, tax, and information technology environments.
