The Internal Revenue Service (IRS) has issued warning notices to assist companies in identifying inaccurate claims for the Employee Retention Credit (ERC). The agency closely examines requests for pandemic-era tax credits and wants companies to be mindful of common mistakes. IRS Commissioner Danny Werfel stated that the agency is actively addressing improper claims and increasing payments to businesses with valid claims, reaffirming the IRS’s commitment to fair tax practices.
To prevent issuing improper refunds that may need to be repaid, the IRS is rejecting tens of thousands of ERC claims that exhibit clear signs of being inaccurate and is scrutinizing hundreds of thousands more claims that indicate a potential for being incorrect. The IRS has also initiated further processing of low-risk claims for eligible claims. As the agency processes more lower-risk claims, businesses can look forward to receiving payments for valid tax periods, while the IRS reviews other periods for eligibility, instilling a sense of hope in the audience.
Recurring themes in ERC claims by businesses that have been flagged as potential issues
The following are some of the common mistakes the IRS has been highlighting.
Essential businesses that could fully operate during the pandemic and didn’t have a decline in gross receipts: Some promoters convinced many essential businesses to claim the ERC when they weren’t eligible because their operations weren’t fully or partially suspended by a qualifying government order. The IRS advises these businesses to review eligibility rules and examples of government orders carefully.
Businesses unable to show how a government order fully or partially suspended business operations: When asked for proof of how the government order suspended their business operatios, businesses have been unable to provide enough information to confirm eligibility.
Reporting family members’ wages as qualified wages: Wages paid to relatives are not qualified for the ERC. Business owners claiming the ERC using wages paid to relatives may be ineligible or claiming the wrong amount. This applies to wages paid to relatives, including spouses, children, siblings, parents, step-parents, nieces, nephews, aunts, uncles, in-laws, and household members.
Using wages already used for Paycheck Protection Program (PPP) loan forgiveness: Participating in the PPP impacts the calculation of qualified wages for the ERC. Wages reported as payroll costs for PPP loan forgiveness are not eligible for ERC up to the forgiven amount. Taxpayers can still use the remainder of their qualified wages to calculate their ERC.
Large employers claiming wages for employees who provided services: Large eligible employers, specifically those with over 100 full-time employees in 2019 and claiming ERC for 2020 tax periods or over 500 full-time employees in 2019 and claiming ERC for 2021 tax periods, can only claim wages for employees who were not providing services during the periods for which they claim ERC. Many large employers have wrongly included wages for employees providing services in their claims.
These warning signs are in addition to the seven problem areas highlighted by the IRS last March.
The IRS advises taxpayers with pending claims to carefully review their filings to confirm their eligibility and ensure that any claimed credits are accurate. Businesses with previously approved claims should also review filings, as the IRS is intensifying compliance efforts.
