IRS Issues New Warnings on Employee Retention Credit Claims: Businesses Urged to Review for Errors
29 July 2024
WASHINGTON, D.C. –The Internal Revenue Service (IRS) has intensified its scrutiny of the Employee Retention Credit (ERC), sharing five new warning signs commonly seen in incorrect claims by businesses. These new issues are in addition to seven previously highlighted problem areas. The IRS advises businesses with pending claims to carefully review their filings for eligibility and to avoid including these 12 warning signs or other errors.
Businesses with these indicators are urged to consult a trusted tax professional and consider utilizing the special ERC Withdrawal Program, which remains available. This proactive approach can help avoid future issues, including audits, penalties, and interest. The IRS plans to issue additional information on new compliance measures, including the reopening of the Voluntary Disclosure Program and processing of low-risk payments to small businesses with legitimate claims.
New Warning Signs Identified by the IRS:
-
Essential Businesses Claiming ERC: Some essential businesses were improperly advised to claim the ERC, even though they could fully operate during the pandemic and did not experience a decline in gross receipts.
-
Lack of Documentation for Government Order Suspensions: Businesses must provide proof that a government order fully or partially suspended their operations.
-
Wages for Family Members: Claims involving wages paid to related individuals, such as spouses, children, or in-laws, are often ineligible.
-
Overlap with Paycheck Protection Program (PPP) Forgiveness: Businesses cannot claim ERC for wages already used to obtain PPP loan forgiveness.
-
Large Employers Claiming ERC for Active Employees: Large employers can only claim ERC for wages paid to employees who were not providing services during the eligible periods.
Previously Highlighted Warning Signs:
- Overclaiming for multiple quarters
- Misinterpreting government orders
- Miscalculations involving employee numbers and wages
- Incorrectly claiming ERC based on supply chain disruptions
- Claiming ERC for entire quarters when only part of the period was affected
- Nonexistent businesses or unpaid wages during the eligibility period
- Misleading advice from promoters claiming there's "nothing to lose"
Options for Resolving Incorrect Claims:
- Claim Withdrawal: Businesses can withdraw unprocessed claims to avoid future compliance issues, with no interest or penalties applied.
- Amending Returns: Businesses that overclaimed the ERC can correct their claims by amending their returns.
The IRS emphasizes the importance of consulting knowledgeable tax professionals to navigate the complex ERC rules and avoid costly errors.
