With the deadline to let the Internal Revenue Service know you got an improper Employee Retention Credit (ERC) fast approaching — it's this Friday, March 22 — business owners who are concerned need to act fast.
Recipients of wrong payments can apply for the IRS' ERC Voluntary Disclosure Program by that deadline. If accepted, the businesses can repay 80 percent of the COVID-era tax credit amount they erroneously received.
They also can avoid penalties and interest, as well as avert possible IRS investigation of the wrong credit claim.
So how do business owners know if the ERC money they got was wrong?
Here are seven warnings signs the IRS says could indicate that an ERC claim is incorrect.
1. Too many quarters being claimed. Some ERC promoters urged employers to claim the tax credit for all quarters that it was available. Qualifying for all quarters is uncommon.
2. Government orders that don't qualify. Some promoters told employers they can claim the ERC if any government order was in place in their area, even if their operations weren't affected or if they chose to suspend their business operations voluntarily. This is false.
Some promoters also suggested that an employer qualifies based on communications from the Occupational Safety and Health Administration (OSHA). This is generally not true.
3. Too many employees and wrong calculations. Employers should be cautious about claiming the ERC for all wages paid to every employee on their payroll. Employers need to meet certain rules for wages to be considered qualified wages, depending on the tax period.
Generally, qualified wages must be wages that are subject to Social Security and Medicare taxes. However, they may also include certain health care expenses you pay for your employees.
Employers also should review all calculations to avoid overclaiming the credit. They should not use the same credit amount across multiple tax periods for each employee. The IRS' ERC 2020 vs 2021 Comparison Chart has specifics on amounts.
4. Business citing supply chain issues. A supply chain disruption by itself doesn't qualify an employer for ERC. An employer needs to ensure that their supplier's government order meets the requirements.
The IRS recommends employers review the rules on supply chain issues, as well as check out the examples in the 2023 legal memo on supply chain disruptions.
5. Business claiming ERC for too much of a tax period. It's possible, but uncommon, for an employer to qualify for ERC for the entire calendar quarter if their business operations were fully or partially suspended due to a government order during a portion of a calendar quarter.
A business in this situation can claim ERC only for wages paid during the suspension period, not the whole quarter. Businesses should check their claim for overstated qualifying wages and should keep payroll records that support their claim.
6. Business didn't pay wages or didn't exist during eligibility period. This is pretty much a no-brainer. No business or no employees, no tax credit.
But some companies in this situation have filed anyway, in many cases following promoters' wrong advice. And such patently wrong filing reports aren't apocryphal. The IRS says it has seen records showing businesses that claimed ERC didn't have any employees, or they claimed the ERC for tax periods before the company existed.
So the IRS is reiterating that employers can only claim the ERC for tax periods when they paid wages to employees.
7. Promoter says there's nothing to lose. The IRS gets it. The tax code is complicated, and sometimes business owners need to get advice, especially for new tax provisions during an unprecedented time like the COVID-19 pandemic.
But a promoter of a service is not necessarily the best adviser, especially when the advice benefits the person or company offering it. This is particularly true of when the business offering the advice is a new one, potentially started to literally take advantage of confusing tax law changes and business owners.
If you filed an ERC claim at the urging of an aggressive promote who told you that you "have nothing to lose," review your tax credit filing now. That advice is wrong. Businesses that incorrectly claim the ERC risk repayment, penalties, interest, audit, and other expenses.
You can use the IRS' interactive ERC Eligibility Checklist. It's also available as a printable guide.
If you don't feel confident in reassessing your ERC claim, hire a reputable tax professional. That tax pro can doublecheck your ERC paperwork and give you the correct answer as to whether it is OK, or you need to apply to the ERC Voluntary Disclosure Program.
Either way, do so quickly. Again, the ERC disclosure deadline is this Friday, March 22.
And if you filed a claim, discover it's incorrect, and haven't received the ERC money yet, act as soon as possible to withdraw that wrong claim.
You also might find these items of interest:
- March 22 is ERC voluntary disclosure deadline
- Tips if the IRS audits your business' ERC claim
- IRS allows businesses to withdraw improper ERC claims
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