IRS Issues Warning on Incorrect Employee Retention Credit Claims

The Internal Revenue Service (IRS) issued a new alert on Friday regarding incorrect claims for the Employee Retention Credit (ERC). The warning highlights five key signs that businesses may be making errors in their ERC claims.

The IRS released these warning signs to help businesses and tax professionals prepare for upcoming measures aimed at addressing improper ERC claims. This includes a temporary reopening of the Voluntary Disclosure Program. Many businesses have been misled by aggressive promoters into claiming this pandemic-era credit when they are not eligible.

Key Points of the IRS Warning

1. Eligibility Criteria: Essential businesses that continued full operations during the pandemic and did not experience a decline in gross receipts are ineligible for the ERC. Businesses must demonstrate that their operations were fully or partially suspended by a qualifying government order. Merely implementing health measures like hand-washing and mask-wearing does not qualify as a suspension of business operations.
2. Proof of Suspension: Businesses must provide evidence that a government order fully or partially suspended their operations. Claims without proper documentation supporting this suspension are ineligible.
3. Wages and Related Individuals: Businesses claiming ERC for wages paid to related individuals, such as family members, are generally ineligible. Additionally, wages that were previously used for Paycheck Protection Program (PPP) loan forgiveness cannot be used for ERC claims.
4. Large Employers: Large employers claiming ERC for employees who were actively working are generally ineligible, though there are specific rules that may apply to large eligible employers.

Previous Warning Signs

The IRS has previously identified several red flags for incorrect ERC claims, including claiming for incorrect quarters, citing non-qualifying government orders, inflating the number of employees, using incorrect calculations, citing supply chain issues, over-claiming for a tax period, and issues related to wage payments or business existence during the eligibility period.

The IRS is intensifying scrutiny on claims that appear risky and is beginning additional processing of low-risk, eligible claims. Businesses with incorrect claims are advised to consider the ERC Withdrawal Program or amend their returns to correct any issues.