IRS Highlights Seven Red Flags for Employee Retention Credit Claims Ahead of March Deadline

Internal Revenue Service (IRS)

WASHINGTON, D.C. — As a crucial deadline approaches, the Internal Revenue Service (IRS) is urging small businesses to ensure their Employee Retention Credit (ERC) claims are accurate and legitimate. The IRS has outlined seven warning signs that could indicate an ERC claim may be incorrect, encouraging businesses to review their eligibility and resolve any issues before the March 22 deadline.

The ERC was designed to support businesses that chose to keep their employees on the payroll despite significant financial challenges posed by COVID-19. However, the IRS has noticed a growing trend of questionable claims, prompting it to share a list of red flags that businesses should be aware of.

  1. Excessive Quarters Claimed: Some businesses have been advised to claim the ERC for all quarters in which the credit was available. However, qualifying for all quarters is rare, and this could indicate a false claim. Businesses should assess their eligibility for each quarter individually.
  2. Non-Qualifying Government Orders: Misinformation has led some businesses to believe they can claim the ERC if there was any government order in their area, even if their operations were not affected or if they voluntarily suspended operations. This is incorrect.
  3. Incorrect Employee Counts and Calculations: The IRS has urged caution when claiming the ERC for wages paid to all employees. Changes to the law in 2020 and 2021 resulted in varying credit amounts and dollar limits. Employers need to meet certain rules for wages to be considered qualified, depending on the tax period.
  4. Citing Supply Chain Issues: An employer citing supply chain disruption as a reason for claiming the ERC is a potential red flag. A supply chain disruption alone does not qualify an employer for the ERC.
  5. Overstated Tax Period Claims: It’s possible, but uncommon, for a business to qualify for the ERC for an entire calendar quarter if their operations were partially or fully suspended due to a government order during part of that quarter.
  6. Non-Existent Wages or Businesses: The IRS has flagged claims from businesses that either had no employees or did not exist during the eligibility period. The IRS has begun disallowing these claims.
  7. Promoter Assurance: The IRS cautions businesses against promoters who assert that there is “nothing to lose” by claiming the ERC. Incorrect claims can lead to repayment requirements, penalties, interest, audits, and potential expenses for hiring assistance to resolve the issue or amend previous returns.
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The IRS’s aim in sharing these warning signs is twofold. First, it hopes to discourage fraudulent claims. Second, it wants to help businesses avoid the significant consequences that can arise from incorrect filings. These can include repayment requirements, penalties, interest, audits, and the cost of hiring professional help to resolve the issue.

This information serves as a reminder to businesses to exercise due diligence when claiming the ERC. It’s crucial to review eligibility requirements carefully, ensure accurate calculations, and be wary of advice that seems too good to be true.

With the March 22 deadline fast approaching, businesses are encouraged to take the time now to review their claims and make any necessary amendments. In doing so, they can avoid potential complications down the line and ensure they are making the most of this valuable credit.

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