IRS Issues Warning Signs for Questionable Employee Retention Credit Claims, IR-2024-39

The IRS has issued a warning to small businesses regarding potential issues with Employee Retention Credit (ERC) claims as the March 22, 2024 deadline for the ERC Voluntary Disclosure Program approaches. Seven suspicious warning signs have been identified based on feedback from tax professionals and compliance personnel. These signs may indicate erroneous claims and could lead to IRS scrutiny. The ERC Voluntary Disclosure Program allows businesses to rectify incorrect claims by repaying just 80% of the amount claimed. Taxpayers who realize their claims are ineligible are urged to quickly pursue the claim withdrawal process.

The IRS has highlighted seven suspicious signs indicating potential inaccuracies in ERC claims. These include:

• Too many quarters being claimed: Employers should ensure they meet eligibilitycriteria for each quarter claimed.
• Government orders that dont qualify: Employers should have clear documentation demonstrating how and when government orders related to COVID-19 impacted their operations.The frequently asked questions about ERC – Qualifying Government Orders section of IRS.gov has helpful examples. Also, employers should avoid a promoter that supplies a generic narrative about a government order.
• Too many employees and wrong calculations : Employers should accurately calculate the credit based on changes in the law and avoid overclaiming. For details about credit amounts, see the Employee Retention Credit – 2020 vs 2021 Comparison Chart.
• Business citing supply chain issues :Employers should carefully review the rules on supply chain issues and examples in the 2023 legal memo on supply chain disruptions.
• Business claiming ERC for too much of a tax period: 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.
• 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.

The Employee Retention Credit (ERC) is available to eligible employers who paid qualified wages to some or all employees between March 12, 2020, and January 1, 2022. Eligibility varies based on the time period:

• For 2020 and the first two quarters of 2021: Eligibility is based on trade or business operations being fully or partially suspended due to a COVID-19-related government order or experiencing a decline in gross receipts.
• For the third quarter of 2021: Eligibility includes suspension of trade or business operations, a decline in gross receipts, or being classified as a recovery startup business.
• For the fourth quarter of 2021: Only recovery startup businesses are eligible.