Recently, the Internal Revenue Service (IRS) has detected five new warning signs associated with the businesses that wrongly claimed the Employee Retention Credit (ERC). Numerous firms and businesses were convinced by assertive marketers to submit this credit without confirming the eligibility requirements by the IRS, leading to errors that could result in investigations, refunds, fines or interests. Therefore, businesses who may have qualified for this program should be careful and check their claims and make sure they have not taken any of the five actions that will be set out below.
1. Essential businesses operating without suspension or decline in gross receipts
The IRS has spotted a major red flag in essential businesses that continued with their normal operations throughout the pandemic. Regardless, a number of these companies were persuaded into claiming ERC even if they did not qualify for it. There was neither full nor partial suspension for most of the essential businesses because there was no significant drop in gross receipts or any relevant government order for that matter. These businesses should therefore check their filing because failure to meet the eligibility requirements by the IRS could have grave consequences including penalties and paying back the credit.
2. Inadequate proof of business suspension due to government orders
Another serious issue is where there is no documentation to support the claim that a government order has fully or partially suspended a business. According to the IRS, businesses must be able to demonstrate that overall operations were affected by government orders in a significant manner. There are numerous cases where adequate proof has not been provided as evidence. Failure to provide proof of their eligibility might result in such companies being fined or incurring the obligation of credit refund in certain situations.
3. Reporting family members’ wages as qualified wages
Another error that may lead to penalties is the reporting of wages paid to your family member as qualifies wages. There are several instances known by the IRS where business owners have incorrectly claimed the ERC based on qualified wages owned by their spouses, children or other family members. In all likelihood, these assertions are overestimated. Companies should meticulously audit all payroll documentation, confirming that only appropriate amounts are encompassed in their ERC requests.
4. Double-dipping: Using wages already used for PPP Loan Forgiveness
Currently, some companies use the same earnings or wages to be eligible for both programs – the ERC and Paycheck Protection Program (PPP) loan forgiveness according to IRS. This is commonly referred to as “double-dipping” and it is strictly illegal according to the laws governing taxation. Businesses cannot claim the ERC on wages already reported as payroll costs for PPP loan forgiveness. Failing to comply with this rule could trigger an audit and significant financial penalties.
5. Claiming wages for employees who provided services
For large employers, a critical error involves claiming the ERC for wages paid to employees who were actively providing services during the pandemic. The IRS stipulates that large employers can only claim the ERC for wages paid to employees who were not working. Many large employers incorrectly included wages paid to employees who continued to perform their duties, which could lead to penalties and repayment of the credit.
