Just like Taylor Swift’s tour, the ERC era is still not over. The IRS has recently issued guidance that outlined five new warning signs that an ERC claim has been incorrectly filed, and announced a plan to reopen the voluntary disclosure program temporarily. To refresh your memory, the ERC, or Employee Reduction Tax Credit, is a refundable tax credit created during the COVID-19 pandemic for certain businesses and tax-exempt organizations with employees who were adversely affected by the pandemic government closure mandates. The requirements differ depending on what time period you are claiming the credit for, but what’s for certain is there have been widespread errors in claiming this credit and many scams targeting businesses to tout their eligibility. Whether by fraud or mistake, many businesses who claimed the ERC improperly are now on the hook to pay it back, potentially with interest and penalties. 

The IRS has been busy digitizing and analyzing over a million claims for errors and has already found tens of thousands of errors. They say that hundreds of thousands more are showing risk for error and will be reviewed. After combing through that data, they provided these five warnings signs that your claim could be ineligible:

  • Essential businesses during the pandemic that could fully operate and didn’t have a decline in gross receipts. –  If a business was deemed ‘essential’ by the government during the pandemic, they were not subject to the same closure orders that other businesses were and therefore cannot claim the ERC. Mandates like hand-washing and mask-wearing do not constitute an operation suspension. 
  • Business unable to support how a government order fully or partially suspended business operations. – Businesses must prove that a government mandate suspended more than a nominal portion of their business in order to qualify. 
  • Business reporting family members’ wages as qualified wages. – Many incorrect claims have been due to business owners claiming wages for family members – which do not count as qualified wages for the ERC. If business owners claimed the ERC using wages paid to related individuals, those claims are likely for the wrong amount or ineligible. 
  • Business using wages already used for Paycheck Protection Program loan forgiveness. – If a business has already received PPP loan forgiveness from the SBA, they cannot claim the ERC on wages that they reported as payroll costs to get PPP loan forgiveness.
  • Large employers claiming wages for employees who provided services. – There were special rules in place for large, eligible employers, including that they cannot claim wages paid to employees providing a service. Large employers include businesses with more than 100 full-time employees in 2019 and claimed ERC for 2020 tax periods, and/or more than 500 full-time employees in 2019 and claimed ERC for 2021 tax periods.

These warning signs join the previous seven the IRS previously highlighted as common issues they were seeing with ERC claims. They are:

  • Too many quarters being claimed.
  • Government orders that don’t qualify.
  • Too many employees and wrong calculations.
  • Business citing supply chain issues.
  • Business claiming ERC for too much of a tax period.
  • Business didn’t pay wages or didn’t exist during eligibility period.
  • Promoter says there’s nothing to lose.

The good news is that if your business has incorrectly filed a claim for the ERC, there are options available for you. If your claim has not yet been processed, you can utilize the ERC withdrawal program, and the IRS will treat the claim as though it had never been filed (no penalties or interest). If you believe you have overclaimed, you can file an amended return to correct the amount. Finally, the voluntary disclosure program will be reopened soon so that businesses found to be ineligible can take action there. 

The ERC is a complicated credit, with different rules for different periods and a lot of misinformation spreading online regarding who is eligible. The IRS has stressed that it is important to work with a trusted tax professional who can navigate the ends and outs of this credit and help determine your eligibility and next steps, especially if you previously worked with an online ‘promotor’ to file. If you have any questions about the Employee Retention Tax Credit, feel free to speak with a member of our team today! We can guide you through your options and provide assistance for moving forward.