As the IRS continues to crack down on incorrect Employee Retention Credit (ERC) claims, businesses need to be more vigilant than ever. On July 26, 2024, the IRS issued a new list of five common warning signs that businesses may have claimed ERC incorrectly, adding to the seven red flags already highlighted earlier this year. With the IRS ramping up its compliance efforts, it’s crucial for businesses to review their claims and take corrective action if needed.
The New Warning Signs: Are You at Risk?
The IRS has identified five new warning signs that could indicate an incorrect ERC claim. These include:
- Essential Businesses Claiming ERC Without a Decline in Gross Receipts: Many essential businesses were misled into claiming ERC, even though they were fully operational during the pandemic and didn’t experience the necessary decline in gross receipts.
- Inadequate Documentation of Government Orders: Businesses that cannot provide sufficient evidence of a government order fully or partially suspending their operations may be at risk.
- Claiming Wages Paid to Family Members: Wages paid to related individuals (such as the owner’s spouse, children, or other family members) generally do not qualify as ERC wages.
- Double Dipping with Paycheck Protection Program (PPP) Loans: If a business has already used wages to qualify for PPP loan forgiveness, those wages cannot be used again to claim ERC.
- Large Employers Claiming ERC for Employees Providing Services: Large employers can only claim ERC for wages paid to employees who were not providing services. Claims including wages for active employees are likely incorrect.
These new red flags are in addition to the seven previously identified by the IRS, which include issues such as over-claiming for too many quarters, misinterpreting government orders, and claiming ERC for supply chain disruptions.
What Should You Do If These Red Flags Apply to You?
If any of these warning signs apply to your business, it’s essential to act quickly. Here are your options:
- Claim Withdrawal: The IRS offers an ERC Withdrawal Program for businesses with unprocessed claims. This allows businesses to withdraw their claim with no penalties or interest, as if the claim was never filed.
- Amending Returns: Businesses that have already received ERC payments but believe their claim was incorrect can amend their returns to correct the issue.
- Voluntary Disclosure Program: The IRS will soon reopen the Voluntary Disclosure Program, offering businesses a brief window to come forward, correct their claims, and avoid potential audits, penalties, and interest.
For more detailed information on these options, visit the IRS’s official page: IRS Shares More Warning Signs of Incorrect Claims for the Employee Retention Credit.
Why It’s Important to Act Now
With the IRS intensifying its compliance efforts, businesses cannot afford to ignore these warning signs. The agency has already digitized and analyzed approximately 1 million ERC claims, representing over $86 billion, and has begun denying claims that clearly show signs of being erroneous. Additionally, the IRS is scrutinizing hundreds of thousands more claims that may be incorrect.
In the words of IRS Commissioner Danny Werfel, “The IRS continues working aggressively to pursue improper claims as well as increase payments going out to businesses with legitimate claims on these complex credits.” As the IRS prepares to roll out additional compliance measures, businesses are strongly urged to review their ERC claims with a trusted tax professional.
Final Thoughts: Protect Your Business from Costly Mistakes
At Torkelson & Associates CPAs, we understand the complexities of the ERC and the importance of ensuring your claims are accurate. If you’re concerned about your ERC claim or if any of these red flags apply to you, contact us today. Our team of experienced professionals can help you navigate these challenges, amend your returns if necessary, and avoid future compliance issues.
Don’t wait until it’s too late—take action now to protect your business from potential audits, penalties, and interest. Visit our services page or contact us for more information on how we can assist you.