In the wake of the COVID-19 pandemic, the Employee Retention Credit (ERC) emerged as a vital financial lifeline for businesses. However, as the IRS intensifies its scrutiny of ERC claims, it has unveiled five new warning signs that businesses must heed to avoid costly mistakes. Understanding these red flags is crucial for maintaining compliance and safeguarding your business from audits, penalties, and interest.

The Rise of Incorrect ERC Claims

The ERC was designed to support businesses that continued paying employees during pandemic-related shutdowns or significant declines in gross receipts. Unfortunately, aggressive promoters have misled many businesses into claiming this credit without meeting the eligibility criteria. The IRS’s recent warning aims to protect businesses from such pitfalls by highlighting common errors.

Five New Warning Signs

  1. Essential Businesses Claiming ERC: Many essential businesses, that operated fully during the pandemic, were convinced to claim the ERC. However, eligibility often requires a full or partial suspension of operations due to a qualifying government order. Businesses must reassess their claims to ensure compliance.

  2. Insufficient Proof of Suspension: Businesses must provide adequate documentation to demonstrate how a government order fully or partially suspended their operations. Without this proof, claims may be deemed ineligible.

  3. Family Members’ Wages: Claims involving wages paid to related individuals are often incorrect. Business owners should verify that their claims exclude such wages to avoid inaccuracies.

  4. Overlap with PPP Loan Forgiveness: The ERC cannot be claimed on wages already used for Paycheck Protection Program (PPP) loan forgiveness. Businesses should review their filings to prevent this common error.

  5. Large Employers’ Service Wages: Large employers can only claim the ERC for wages paid to employees who are not providing services. Claims including wages for active employees are likely incorrect.

Avoiding Common Pitfalls

In addition to these new warning signs, the IRS has previously cautioned businesses about other issues, such as claiming too many quarters, miscalculating employee numbers, and citing non-qualifying government orders. Businesses should also be wary of promoters who downplay the risks of incorrect claims.

Taking Action

To navigate these complexities, businesses are encouraged to consult with trusted tax professionals. If errors are identified, the IRS offers a claim withdrawal program and a second ERC Voluntary Disclosure Program to rectify incorrect claims without severe repercussions.

Next Steps

As the IRS continues to refine its oversight of the ERC, businesses must remain vigilant and informed. By understanding and addressing these warning signs, you can ensure your ERC claims are accurate and compliant, protecting your business from potential audits and penalties. For expert guidance and peace of mind, reach out to our office with any questions.