The IRS warns of certain red flags that might indicate a questionable Employee Retention Credit (ERC) claim, aiming to assist small businesses as a crucial March deadline approaches.
The ERC program, part of the two trillion, two hundred billion dollars Cares Act, aimed to encourage employers to retain workers during the pandemic's early stages. However, fraudulent ERC claims have emerged, prompting the IRS to crack down on pop-up businesses, known as "ERC mills," that falsely market the program to ineligible employers.
As of mid-September 2023, the IRS had received over 3.6 million ERC claims. However, due to a surge in fraudulent submissions, the IRS halted the processing of new claims, initiating a broader compliance effort in collaboration with the Justice Department to tackle fraud in the ERC program and crack down on promoters encouraging businesses to apply unlawfully. The alert comes as the March 22, 2024, deadline nears for the ERC Voluntary Disclosure Program for businesses that mistakenly filed claims and received payments, allowing them to repay just 80% of the claim.
Some promoters encouraged more applicants, often taking a cut of the payout.
Businesses should be aware of these warning signs, review their uncertain claims, and act swiftly before the special disclosure and withdrawal programs end to prevent penalties and interest.
1. Claiming ERC for All Available Quarters
Some promoters have urged employers to claim the ERC for all available quarters, which might not be accurate. Employers should check if they qualify for each quarter before making a claim.
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2. Unqualified Government Orders
Promoters wrongly claim that employers can get the ERC if any government order was in place, even if their operations were not impacted or they chose to suspend operations voluntarily. This is incorrect, as per the IRS. To legitimately claim the ERC under government order rules:
- Government orders must have been in effect, and the order must have either fully or partially suspended the employer's operations during the claimed period.
- The order must be related to the COVID-19 pandemic.
- It must be an official government order, not just guidance or a recommendation.
Some promoters wrongly claim that employers qualify for the ERC based on communications from the Occupational Safety and Health Administration (OSHA). However, according to the IRS, this is generally not true. For more details and examples, check the ERC frequently asked questions about OSHA communications and the 2023 legal memo on OSHA communications.
Employers can find useful examples in the Qualifying Government Orders section of IRS.gov. Employers need documentation of the specific government order related to COVID-19 and how it impacted their operations. They should be cautious of promoters who provide generic narratives about government orders.
3. Too Many Employees and Wrong Calculations
When claiming the Employee Retention Credit (ERC), employers must be cautious with different dollar limits and credit amounts for the tax period, as laws have changed during 2020 and 2021. Employers must meet specific rules for wages to qualify. The IRS advises employers to review calculations carefully to avoid overclaiming the credit, which can occur if the same credit amount is mistakenly used across multiple tax periods for each employee.
4. Business Declaring Supply Chain Issues
The employer must confirm that their supplier's government order meets the requirements, as it is uncommon to qualify for the Employee Retention Credit (ERC) based solely on a supply chain disruption. Employers should examine the rules regarding supply chain problems and review examples in the 2023 legal memo for guidance.
5. Business Claiming ERC for Excessive Tax Period
Although uncommon, an employer may qualify for the Employee Retention Credit (ERC) for an entire calendar quarter if a government order suspends their operations fully or partially. In such cases, the ERC can only be claimed for wages paid during the suspension period, not for the entire quarter. Employers should review their claims to ensure they have not overstated qualifying wages and maintain accurate payroll records to support their claims.
6. Business Not Paying Wages or Didn't Exist During the Eligibility Period
The IRS disallows some taxpayers who claim the Employee Retention Credit (ERC) for tax periods when they did not pay wages to employees or when their business did not exist, and now works on other aspects for ERC compliance.
7. Promoter Saying There's Nothing to Lose
Businesses should be cautious of ERC promoters encouraging them to claim the credit by saying they "have nothing to lose." Incorrectly claiming the ERC can lead to repayment demands, penalties, interest, audits, and potential expenses for correcting the claim or representing the business in an audit.
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