The IRS has recently identified five new warning signs of incorrect Employee Retention Credit (ERC) claims, a pandemic-era tax credit designed to help businesses retain employees. As part of its ongoing efforts to ensure compliance, the IRS scrutinizes claims and provides guidance to prevent businesses from making errors that could result in denied credits or required repayments.
- Essential Businesses and ERC Eligibility
Promoters convinced many essential businesses to claim the ERC, even when they were not eligible. Essential businesses that operated fully during the pandemic and did not experience a significant decline in gross receipts are generally not eligible for the ERC. Simple modifications, such as requiring employees to wash hands or wear masks, do not constitute a suspension of business operations. Businesses are urged to review the specific eligibility rules and ensure their claims align with the guidelines.
- Proof of Business Suspension Due to Government Orders
To qualify for the ERC, businesses must demonstrate that a government order fully or partially suspended their operations. The IRS has found that many businesses cannot provide adequate proof that such orders significantly affected their operations. It is crucial for businesses to document how specific government mandates impacted their ability to operate.
- Reporting Wages of Family Members
Wages paid to relatives of business owners are not eligible for the ERC. The IRS highlights that claims, including wages paid to family members, such as spouses, children, or other relatives, are often incorrect. To avoid filing erroneous claims, businesses must exclude these wages when calculating their eligible credit amount.
- Overlapping with Paycheck Protection Program (PPP) Loans
Businesses that received PPP loans and had them forgiven cannot claim the ERC on wages reported as payroll costs for PPP loan forgiveness. The IRS notes this has been a common mistake, as businesses cannot use the same wages for PPP forgiveness and ERC. It’s essential to distinguish between the wages used for each program to ensure compliance.
- Large Employers and Service-Providing Employees
For large employers—those with over 100 full-time employees in 2019 for 2020 tax periods or more than 500 for 2021 tax periods—the ERC can only be claimed for wages paid to employees not providing services. The IRS has found that many large employers mistakenly included wages paid to actively working employees, which is not permissible under the ERC rules.
Ongoing IRS Actions and Advice
The IRS emphasizes the importance of consulting with trusted tax professionals rather than promoters when dealing with ERC claims. The agency also processes additional claims, focusing on low-risk claims and addressing any errors to prevent improper refunds that businesses may have to repay.
Businesses should stay informed and ensure their ERC claims are accurate and well-documented. This not only helps avoid penalties but also ensures that they receive the credits for which they are rightfully eligible. The IRS is expected to provide more updates on its compliance efforts and guidelines in the coming days.
For businesses still navigating the complexities of the ERC, it is crucial to review the eligibility criteria carefully and consult with knowledgeable professionals to ensure compliance with IRS regulations.
Schedule an Appointment Below!
M.A. Rubin CPA, PLLC
Tel: 833-MA-Rubin (627-8246)
Email: Blog@RubinTaxRelief.com
Disclaimer: This blog post is for informational purposes only and does not constitute legal or tax advice. Consult with a qualified professional for specific advice regarding your business.
