Identifying Red Flags: Is Your ERC Claim on Unsteady Ground?

The IRS has warned small businesses, identifying seven red flags that may indicate a questionable Employee Retention Credit (ERC) claim. These signs are being highlighted to help companies address any issues before the March deadline for a particular disclosure program. The ERC was introduced to support certain companies during the COVID-19 pandemic, and the IRS is taking steps to address misleading marketing campaigns and prevent improper claims. The seven warning signs that the IRS is focusing on when reviewing ERC claims are as follows:

1. Too many quarters being claimed: Some promoters have encouraged employers to claim the ERC for all available quarters, which is uncommon and could signal an incorrect claim.
2. Government orders that don’t qualify: Some promoters have provided misleading information, suggesting that the ERC can be claimed based on any government order, even if it did not affect the business operations.
3. Too many employees and wrong calculations: Employers should be cautious about claiming the ERC for all wages paid to every employee, as the law changed throughout 2020 and 2021.
4. Business citing supply chain issues: A supply chain disruption alone does not qualify an employer for the ERC, and claiming the credit based solely on this reason is uncommon.
5. Business claiming the ERC for too much of a tax period: It is uncommon for an employer to qualify for the ERC for the entire calendar quarter if their business operations were only partially suspended due to a government order during a portion of the quarter.
6. Businesses did not pay wages or did not exist during the eligibility period: Employers can only claim the ERC for tax periods when they pay wages to employees.
7. Promoter says there is nothing to lose: Businesses should be wary of promoters who urge them to claim the ERC because they “have nothing to lose,” as incorrect claims can lead to repayment requirements, penalties, interest, and potential expenses.

The IRS has urged ERC claimants to review their qualifications with a trusted tax professional before the March deadline for the particular disclosure and withdrawal programs to avoid penalties and interest. Businesses must carefully assess their eligibility and ERC claims to avoid potential repercussions.

Source ( Journal of Accountancy News).