IRS Warns of Common Errors in Employee Retention Credit Claims: How to Avoid Penalties and Audits

In a recent update, the IRS has highlighted new warning signs businesses should be aware of when filing for the Employee Retention Credit (ERC). As this credit becomes increasingly scrutinized, it’s vital for businesses to ensure their claims are accurate to avoid potential penalties, interest, or audits.

Review Your ERC Claims

The IRS has identified five additional warning signs that have been frequently observed in incorrect ERC claims. These issues add to the previously highlighted areas of concern, bringing the total to twelve common mistakes businesses should be vigilant about.

Businesses with pending or approved ERC claims should review their filings carefully. Confirm eligibility and ensure that the claims do not include any of these red flags. Consulting a trusted tax professional is advisable to verify the accuracy of the claims and to consider participating in the special ERC Withdrawal Program if necessary. This program can help businesses avoid future complications by retracting erroneous claims before they are processed.

Upcoming IRS Compliance Measures

For those businesses considering applying for the ERC, it’s equally important to take these steps beforehand. The IRS is increasing efforts to identify and address improper claims, which could lead to audits, repayment of the credit, and additional penalties.

The IRS’s recent announcement aims to give businesses and tax professionals ample time to prepare for upcoming measures to counteract incorrect ERC claims. This includes new compliance initiatives targeting high-risk claims and the reopening of the Voluntary Disclosure Program for a limited time. The agency also plans to expedite the processing of legitimate, low-risk claims to support eligible businesses.

As IRS Commissioner Danny Werfel stated, “The IRS continues to work aggressively to pursue improper claims and ensure that payments go to businesses with legitimate claims on these complex credits.” The IRS emphasizes the importance of consulting a qualified tax professional rather than relying on promoters to avoid misleading advice and potential issues.

Five New Warning Signs of Incorrect ERC Claims

1. Essential Businesses Fully Operational During the Pandemic: Many essential businesses were advised by promoters to claim the ERC despite being ineligible. Essential businesses that were not fully or partially suspended by a government order should reassess their claims.
2. Insufficient Documentation of Government Order Impact: Businesses must provide adequate proof of how a government order suspended more than a nominal portion of their operations to qualify for the ERC.
3. Incorrect Reporting of Family Members’ Wages: Wages paid to related individuals, such as spouses or children, are generally not considered qualified wages for the ERC. Businesses should review the specific eligibility rules related to family members.
4. Duplicate Use of Wages for ERC and PPP Loan Forgiveness: Wages used to obtain forgiveness for a Paycheck Protection Program (PPP) loan cannot also be claimed for the ERC. Businesses need to carefully calculate and report qualified wages to avoid double-dipping.
5. Large Employers Claiming Wages for Employees Providing Services: Large employers can only claim ERC for wages paid to employees who were not providing services. Incorrectly including such wages can lead to disallowed claims.

In addition to these new signs, the IRS continues to remind businesses of previously identified issues, such as claiming for too many quarters, misinterpreting government orders, and using the same wages across multiple tax periods.

Options for Correcting Errors

For businesses that have identified potential errors in their ERC claims, the IRS offers options for correction. The ERC Withdrawal Program allows businesses to withdraw unprocessed claims without penalty. Alternatively, businesses can amend their returns to correct overclaimed amounts.

Stay informed and proactive to ensure compliance and avoid unnecessary penalties. For personalized assistance and guidance on navigating the complexities of the ERC, consider reaching out to Honest Accounting Group. Our team is here to help you ensure your business’s financial health and compliance.