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 4. IRS shares 7 warning signs Employee Retention Credit claims may be
    incorrect; urges businesses to revisit eligibility, resolve issues now
    before March 22


IRS SHARES 7 WARNING SIGNS EMPLOYEE RETENTION CREDIT CLAIMS MAY BE INCORRECT;
URGES BUSINESSES TO REVISIT ELIGIBILITY, RESOLVE ISSUES NOW BEFORE MARCH 22

 


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IR-2024-39, Feb. 13, 2024

WASHINGTON — With a key March deadline quickly approaching, the Internal Revenue
Service today highlighted special warning signs that an Employee Retention
Credit (ERC) claim may be questionable to help small businesses that may need to
resolve incorrect claims.

The agency alerted businesses about seven suspicious warning signs that could
signal future IRS problems involving ERC claims. The indicators, built on
feedback from the tax professional community and IRS compliance personnel,
center on misinformation some unscrupulous ERC promoters used. Many of these
groups urged taxpayers to ignore advice from trusted tax professionals and claim
the pandemic-era credit even though they may not qualify.

“IRS compliance activity continues increasing involving Employee Retention
Credit claims, and those claiming this pandemic-era credit need to quickly
review their situation to avoid future problems,” said IRS Commissioner Danny
Werfel. “Many businesses were wildly misled about the qualifications, and the
IRS is taking a special step to highlight common problems being seen about these
claims. The IRS urges ERC claimants to get with a trusted tax professional and
review their qualifications before time runs out on IRS disclosure and
withdrawal programs. The ‘suspicious seven’ signs released today are clear red
flags that ERC claimants should carefully review.”

The alert comes as a March 22, 2024, deadline approaches for the ERC Voluntary
Disclosure Program for anyone that filed a claim in error and received a
payment; the disclosure program allows businesses to repay just 80% of the
claim. Taxpayers who filed a claim previously that hasn’t been processed should
also review the guidelines and quickly pursue the claim withdrawal process if
they now see their claim is ineligible.

The IRS took steps on the ERC program after the well-intentioned pandemic-era
program came under aggressive, misleading marketing that oversimplified or
misrepresented eligibility rules. Promoters pushed more applicants into the
program, frequently by taking a percentage of the payout. The IRS wants
businesses to know about these warning signs, revisit their claim if there are
questions and act quickly before the special disclosure and withdrawal programs
end. Resolving an incorrect claim through the IRS’s special programs will avoid
penalties and interest.

“We’ve heard from the tax pro community and others that sharing more warning
signs can help point well-intentioned people in the right direction,” Werfel
said. “Many of these taxpayers were misled by overzealous and unscrupulous
promoters taking advantage of honest taxpayers. The most beneficial time to
resolve any incorrect claims is now before this special window closes.”

The ERC, sometimes called the Employee Retention Tax Credit or ERTC, is complex,
and the IRS urged claimants to talk to a reputable tax professional for help
with an ERC claim. Taxpayers should avoid working with anyone who doesn’t ask
for details or business records, such as payroll records.


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:

 * 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.

 * 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 communicationsPDF 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.
      
 * 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.
    
 * 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 disruptionsPDF.
    
 * 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.
    
 * 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.
    
 * Promoter says there’s nothing to lose. Businesses should be on high alert
   with 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, audit and potential expenses of hiring
   someone to help resolve the incorrect claim, amend previous returns or
   represent them in an audit.


RESOLVING INCORRECT ERC CLAIMS

Businesses that are not eligible for ERC but have received it – as a check
that’s been cashed or deposited, or in the form of a credit applied to a tax
period – may be able to participate in the IRS’s ERC Voluntary Disclosure
Program. The special program runs through March 22, 2024, and allows eligible
participants to repay their incorrect ERC, minus 20%.

If a taxpayer’s ERC is incorrect and is paid after Dec. 21, 2023, they aren’t
eligible for the ERC VDP. They should not cash or deposit their check. They can
withdraw the claim, return the check and avoid penalties and interest.

The withdrawal option lets certain employers withdraw their ERC submission and
avoid future repayment, interest and penalties. Businesses can use this option
if they haven’t received the payment, or they've received a check but haven’t
deposited or cashed it. If a taxpayer’s withdrawal request is accepted, the IRS
will treat the claim as though it was never filed.


RESOURCES AND TOOLS TO LEARN MORE ABOUT ERC ELIGIBILITY

The IRS’s frequently asked questions on ERC include links to additional
resources and some helpful examples. The IRS also has an interactive ERC
Eligibility Checklist that tax professionals and taxpayers can use to check
potential eligibility for ERC. It’s also available as a printable guidePDF.


ELIGIBILITY HIGHLIGHTS

The ERC is available to eligible employers that paid qualified wages to some or
all employees after March 12, 2020, and before Jan. 1, 2022. Eligibility and
credit amounts vary depending on when the business impacts occurred. The ERC is
not available to individuals.

 * For 2020 and the first two calendar quarters of 2021, an employer may qualify
   if their trade or business operations were fully or partially suspended due
   to a government order related to COVID-19 or they experienced the required
   decline in gross receipts.
 * For the third quarter of 2021, an employer may qualify if their trade or
   business operations were fully or partially suspended due to a government
   order related to COVID-19, they experienced the required decline in gross
   receipts, or they were considered a recovery startup business.
 * For the fourth quarter of 2021, only recovery startup businesses are
   eligible.

Page Last Reviewed or Updated: 13-Feb-2024
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