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7 Warning Signs that your ERC Claim is Questionable

February 22, 2024

Wondering if your claim for the employee retention credit (ERC) is legitimate? The IRS is alerting employers to watch out for 7 warning signs that your claim may be questionable and to take action by March 22, 2024 to resolve any issues. Read on.

Attention businesses…if you’re suspicious of your claim for the ERC, take action before March 22nd! The IRS has shared 7 warning signs that your claim may be invalid or incorrect. Let’s dive in.


Check out our ERC Insights page for more information on the ERC and how to qualify for the credit.

7 warning signs

  1. Claiming the ERC for too many quarters- If you were urged to claim the credit for all calendar quarters that it was available, that is a red flag. It is uncommon for businesses to qualify for all quarters.

    Remember, to qualify you must have had at least a 50% decline in gross receipts in any calendar quarter in 2020 compared to the same quarter in 2019 (20% decline in gross receipts in any calendar quarter in 2021 (or Q4 2020) compared to the same quarter in 2019) or be impacted by a US government shutdown order.

  2. Nonqualifying government orders- If a government order was in place in your area but your operations were not affected or you chose to suspend business operations voluntarily, this does not make you eligible for the ERC. Under government order rules, you are only eligible for the ERC if you experienced a full or partial suspension of operations during 2020 or 2021 because of governmental orders limiting commerce and impacting your business (due to the COVID-19 pandemic).

  3. Too many employees/wrong calculations- Did you claim the ERC for all wages paid to every employee on your payroll? That’s a warning sign as the law changed throughout 2020 and 2021. There are certain rules for wages to be considered qualified wages as well as dollar limits and varying credit amounts.

    The Consolidated Appropriations Act (CAA) made two major changes to the ERC for 2021. First, it increased the overall covered wage ceiling from 50% to 70% of qualified wages paid during the applicable eligibility period. In addition, it increased the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter as opposed to year. For 2021, the maximum ERC is $7,000 per employee per quarter (70% × $10,000). For 2020, the maximum credit was only $5,000 per employee for the entire tax year.
  4. Qualification based on supply chain issues- Remember, a supply chain disruption on its own does not qualify you for the ERC. In order to substantiate the claim, the employer must provide proof of the US shutdown order affecting the supplier and substantiate that its operations were impacted by the order. Learn more in our blog, IRS Issues New Guidance on ERC and Supply Chain Disruptions.

  5. Claiming the ERC for too much of a tax period- You can qualify for ERC for the entire calendar quarter if your business operations were fully or partially suspended due to a government order, BUT it’s uncommon. If you’re in this situation, keep in mind that you can only claim the ERC for wages paid during the suspension period, not the entire quarter.

  6. Claiming the ERC for tax periods when they did not pay wages to employees- You can only claim the ERC for tax periods where you paid wages to employees, so if records show that you did not have any employees or show that you claimed the ERC before you had an employer identification number with the IRS, that is a red flag.

  7. Claiming the ERC on the advice “there’s nothing to lose”- If you were urged to claim the ERC under the guise “there’s nothing to lose,” be on high alert. Listening to ERC promoters and incorrectly filing an ERC claim runs you the risk of repayment requirements, penalties, interest and audit expenses.

What should you do to resolve incorrect claims?

Check out our blog, IRS Announces New Voluntary Disclosure Program for False ERC Claims.

The voluntary disclosure program runs through March 22, 2024 and allows you to repay 80% of your incorrect ERC. You can access the application here: Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program.

Questions? Contact us.

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