The IRS on Friday issued five new warning signs that a business has filed an incorrect claim for the pandemic-era employee retention credit (ERC). The IRS plans to announce new steps soon to counter improper claims, including reopening the voluntary disclosure program.
In coming days, the IRS plans to provide details on new compliance work involving high-risk ERC claims, a short-term reopening of the voluntary disclosure program, and an update about impending processing of low-risk payments to help small business with legitimate claims, according to a news release. These steps follow the announcement in June that the IRS was denying more of the highest-risk ERC claims.
“As we prepare for the next major announcement, we want businesses to be aware of common errors our compliance teams are seeing, many of which reflect bad advice coming from promoters,” IRS Commissioner Danny Werfel said in the release. “The IRS continues to urge people with pending claims or previously approved payments to talk to a trusted tax professional rather than a promoter and see if any of these red flags apply to them.”
The most recent warning signs are the result of what IRS compliance teams found as they analyzed and processed ERC claims, the release said. They are in addition to seven problem areas the IRS previously highlighted.
The ERC was designed to help certain businesses continue paying employees during the COVID-19 pandemic while their operations were either fully or partially suspended due to a government order or had a significant decline in gross receipts during the eligibility periods. It was generally available to eligible businesses from March 31, 2020, to Sept. 30, 2021, and to Dec. 31, 2021, for recovery startup businesses.
To protect against improper claims, the IRS announced in June that it had digitized and analyzed about 1 million ERC claims representing more than $86 billion. The Service plans to deny tens of thousands of ERC claims that show clear signs of being erroneous.
The IRS also is reviewing hundreds of thousands more claims that show a risk of being incorrect and beginning additional processing of low-risk claims to those with eligible claims.
5 new warning signs
The IRS describes five new signs of an incorrect ERC claim:
- Essential businesses during the pandemic that could fully operate and did not have a decline in gross receipts: Promoters convinced essential businesses to claim the ERC, but many essential businesses were not eligible because their operations were not fully or partially suspended by a qualifying government order.
- Businesses unable to support how a government order fully or partially suspended business operations: Determining whether a business was fully or partially suspended depends on its specific situation. When asked for proof of how a government order suspended more than a nominal portion of their business operations, many businesses have not provided enough information to confirm eligibility.
- Business reporting family members’ wages as qualified wages: If business owners claimed the ERC using wages paid to related individuals, those claims are likely for the wrong amount or ineligible.
- Business using wages already used for Paycheck Protection Program (PPP) loan forgiveness: The U.S. Small Business Administration (SBA) offered the PPP, which provided SBA-backed loans that helped businesses keep their workforce employed during the pandemic. The PPP ended May 31, 2021, but borrowers could still apply for PPP loan forgiveness. If the SBA forgave the loan, businesses cannot claim the ERC on wages that they reported as payroll costs to get PPP loan forgiveness.
- Large employers claiming wages for employees who provided services: Special rules applied to large eligible employers, which are those that averaged over 100 full-time employees in 2019 and claimed the ERC for 2020 tax periods, and/or over 500 full-time employees in 2019 and claimed the ERC for 2021 tax periods.
Large eligible employers can claim only wages paid to employees who were not providing services. Many large employers’ claims incorrectly included wages for employees who were providing services during these periods. The IRS has posted an ERC comparison chart that provides more details.
Previously shared signs of an incorrect ERC claim include too many quarterly periods being claimed; government orders that do not qualify; too many employees and wrong calculations; a business that cites supply chain issues; businesses claiming the ERC for too much of a tax period; businesses that did not pay wages or did not exist during the eligibility period; and a promoter who says there is nothing to lose.
Options for resolving incorrect claims
These options were provided by the IRS to resolve incorrect ERC claims:
- Claim withdrawal: Given the large number of questionable claims identified in the recent review, the IRS continues to urge ineligible businesses with unprocessed claims to consider the ERC withdrawal program to avoid future compliance issues. The IRS will treat the claim as though the taxpayer never filed it. No interest or penalties will apply.
- Amend a return: Businesses that overclaimed the ERC can amend their returns to correct the amount of their claim.
- Voluntary disclosure program: The IRS said it is in the final stages of reopening this program for a brief period. Additional details are expected shortly.
AICPA resources
The AICPA Tax Section has created an ERC resources page to help members understand the credit and the IRS claims processing process.