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To help small businesses looking to resolve incorrect claims, the IRS recently published special warning signs that an Employee Retention Credit (ERC) claim may be questionable or incorrect. With the March 22, 2024 deadline approaching for the ERC Voluntary Disclosure Program – which is for anyone who filed a claim in error and received a payment, allowing businesses to repay just 80% of the claim – any business that has filed an ERC claim should be aware of suspicious signs that their claim may not be accurate.
7 Suspicious Signs an ERC Claim Could Be Incorrect
Here are some of the common red flags being seen on ERC claims that the IRS is focusing on:
1. Too many quarters being claimed
Some promoters have urged employers to claim the ERC for all quarters that the credit was available. Qualifying for all quarters is uncommon, and this could be a sign of an incorrect claim. Employers should carefully review their eligibility for each quarter.
2. Government orders that don’t qualify
Some promoters have told employers they can 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. To claim the ERC under government order rules:
- Government orders must have been in effect, and the employer’s operations must have been fully or partially suspended by the government order during the period for which they’re claiming the credit.
- The government order must be due to the COVID-19 pandemic.
- The order must be a government order, not guidance, a recommendation, or a statement. Some promoters suggest that an employer qualifies based on communications from the Occupational Safety and Health Administration (OSHA). This is generally not true. See the ERC FAQ about OSHA communications and the 2023 legal memo on OSHA communication for details and examples. The frequently asked questions about ERC – Qualifying Government Orders section of IRS.gov has helpful examples. Employers should make sure they have documentation of the government order related to COVID-19 and how and when it suspended their operations. Employers should avoid a promoter that supplies a generic narrative about a government order.
3. Too many employees and wrong calculations
Employers should be cautious about claiming the ERC for all wages paid to every employee on their payroll. The law changed throughout 2020 and 2021. There are dollar limits and varying credit amounts, and employers need to meet certain rules for wages to be considered qualified wages, depending on the tax period. The IRS urges employers to carefully review all calculations and to avoid overclaiming the credit, which can happen if an employer erroneously uses the same credit amount across multiple tax periods for each employee. For details about credit amounts, see the Employee Retention Credit – 2020 vs 2021 Comparison Chart.
4. Business citing supply chain issues
Qualifying for ERC based on a supply chain disruption is very uncommon. 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 disruptions.
5. Business claiming ERC 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 should keep payroll records that support their claim.
6. Business didn’t pay wages or didn’t exist during eligibility period
Employers can only claim ERC for tax periods when they paid wages to employees. Some taxpayers claimed the ERC, but records available to the IRS show they didn’t have any employees. Others have claimed ERC for tax periods before they even had an employer identification number with the IRS, meaning the business didn’t exist during the eligibility period. The IRS has started disallowing these claims, and more work continues in this area as well as other aspects of ERC.
7. Promoter says there’s nothing to lose
Businesses should be on high alert for any ERC promoter who urged them to claim ERC because they “have nothing to lose.” Businesses that incorrectly claim the ERC risk repayment requirements, penalties, interest, audits, and the potential expenses of hiring someone to help resolve the incorrect claim, amend previous returns, or represent them in an audit.
The IRS does urge claimants to talk to a reputable tax professional for help with an ERC claim, and that taxpayers should not work with anyone who doesn’t ask for details or business records, such as payroll records.
How to Resolve Incorrect ERC Claims
If your business is not eligible for ERC but have received either a check that’s been cashed or deposited or a credit applied to a tax period, you may be able to participate in the Voluntary Disclosure Program (VDP). If your ERC is incorrect and was paid after Dec. 21, 2023, you aren’t eligible for the VDP, so do not cash or deposit your check. Instead, you should withdraw the claim and return the check to avoid penalties and interest. If your withdrawal request is accepted, the IRS will treat the claim as though it was never filed.
ERC Resources and Eligibility Tools
See the IRS’s frequently asked questions on ERC for links to additional resources and some helpful examples. Tax professionals and taxpayers can also use the IRS’ interactive ERC Eligibility Checklist to check potential eligibility for ERC.
Download the Complete Guide to Small Business Payroll
Running a business is no easy task. From hiring and paying employees to calculating and reporting payroll taxes and knowing all of the federal, state, and local labor laws that affect your business, it can seem overwhelming, especially when you are running a small business and don’t have a management team to handle everything. That’s why we’ve put together The Complete Guide to Small Business Payroll which will help you with what you need to know, whether you outsource your small business payroll or use your own payroll processing system. If you’re looking to outsource your payroll and HR functions, download our human capital management (HCM) brochure below.
