As we reported in February, the IRS alerted employers to watch out for seven warning signs that their Employee Retention Credit (ERC) claim may be questionable. As of July 2024, there are five new ERC red flags. Here’s how to stay vigilant.

Background

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

For quite some time now, the IRS has been inundated with false claims for the credit. Many employers have been pushed to submit claims even though they are ineligible.

What’s new?

The IRS has identified five new recurring signs of an incorrect ERC claim. Here’s what to watch out for.

1. Being a business deemed essential during the pandemic that operated and did not realize a decline in gross receipts and submitted a claim for ERC. Many essential businesses’ operations were not fully or partially suspended by a government order and in certain cases their revenues and profits increased. With this fact pattern, these businesses would not be eligible to claim the ERC.
2. The IRS requires specific proof of how a government order fully or partially suspended business operations. If applying for ERC under the provision whereby your business was impacted by a government order, you must be able to provide information under audit to identify which (and substantiate how the) government order impacted more than a nominal portion of your business.
3. Wages paid to family members are not considered qualified wages for the ERC. Certain promoters attempted to convince business owners that wages paid to related individuals are qualified wages for the ERC. This IS NOT the case. IRS guidance lists the family members of a business owner whose wages are ineligible for the credit which is substantially all related family members.
4. You cannot claim the ERC on wages you reported as payroll costs to get Paycheck Protection Program (PPP) loan forgiveness. Businesses must exclude these wages when calculating the ERC but can still use any other qualified wages to figure out their credit.
5. Large employers cannot claim the ERC for wages paid to employees who were providing services. The IRS has published an ERC Comparison Chart that provides more details about eligibility.

What should you do if you realize your ERC claim is incorrect?

There are a few things you can do to resolve incorrect claims:

1. Amend your return: If you discover that your business overclaimed the ERC, you can correct the amount on an amended return.
2. Claim withdrawal: Did you file an ERC claim after being pressured or misled by ERC marketers or promoters? Certain employers that filed a claim and are now doubting their eligibility and have not yet received said refund now have the option to withdraw their submission and avoid future repayment of amounts claimed and assessed interest and penalties.
3. Take advantage of the Voluntary disclosure program: The ERC voluntary disclosure program allows employers to repay 80% of a falsely claimed ERC claim without penalty or interest if they meet these requirements. As of July 2024, the IRS is in the final stages of reopening this program.