The Internal Revenue Service (IRS) has issued a warning to businesses claiming the Employee Retention Credit (ERC), highlighting seven common signs that may indicate incorrect claims. As the March 22 deadline approaches for entering the Voluntary Disclosure Program, the IRS urges businesses to review their eligibility for the credit and resolve any issues promptly. Optima Tax Relief provides a summary of the warning signs identified by the IRS and offers guidance for businesses to ensure compliance with ERC requirements.
Key Points from the IRS Announcement
- Inaccurate Payroll Data: The IRS warns that businesses with discrepancies in payroll data, such as incorrect wages or hours reported, may be ineligible for the ERC. It is essential for businesses to review their payroll records for accuracy before claiming the credit.
- Claiming Credits for Ineligible Quarters: Businesses are only eligible to claim the ERC for specific quarters in which they experienced a significant decline in gross receipts or were subject to government-mandated shutdowns. Claiming credits for quarters that do not meet these criteria may result in incorrect claims.
- Ineligible Employers: Certain employers are ineligible for the ERC. For example, if business operations weren’t affected by COVID-19, or if a business chose to suspend operations voluntarily, they do not qualify for the ERC. Businesses should verify their eligibility status before claiming the credit to avoid penalties or repayment obligations.
- Failure to Allocate Wages Properly: The IRS cautions against improperly allocating wages between qualified and non-qualified wages when calculating the ERC. The ERC guidelines changed throughout 2020 and 2021. Those who claimed the ERC for all wages paid to all employees during that time will be looked at suspiciously. Businesses should ensure that wages used to claim the credit meet the eligibility requirements outlined in IRS guidance.
- Ignoring Guidance Updates: The IRS advises businesses to stay informed about updates and changes to ERC guidance issued by the agency. Failure to comply with updated requirements may result in incorrect claims and potential penalties.
- Reporting Supply Chain Issues: The IRS said publicly that claiming the ERC based on supply chain issues is rare. It is also not enough to claim the credit. Employers should review the rules surrounding this topic to confirm their eligibility.
- Insufficient Documentation: Businesses claiming the ERC should maintain adequate documentation to support their eligibility for the credit. There have been several businesses that have claimed the ERC for periods in which they did not have an EIN or employees. Lack of documentation or incomplete records may raise red flags during IRS audits or examinations.
- Ignoring Outreach from the IRS: The IRS may contact businesses to request additional information or clarification regarding ERC claims. Ignoring or failing to respond to IRS inquiries may result in delays or denials of the credit.
Implications for Businesses
It’s essential to heed the warning signs identified by the IRS and take proactive steps to ensure compliance. Failure to verify eligibility or address potential issues may lead to incorrect claims, IRS audits, and financial penalties.
To mitigate the risk of incorrect ERC claims, businesses should:
- Review payroll records and financial data for accuracy.
- Verify eligibility status based on IRS guidance and updates.
- Properly allocate wages and document eligibility for the credit.
- Respond promptly to IRS inquiries and requests for information.
- Seek guidance from tax professionals or advisors to navigate ERC requirements effectively.
Conclusion
In conclusion, the IRS’s warning regarding Employee Retention Credit claims underscores the importance of diligence and compliance for businesses seeking to benefit from the credit. By addressing potential issues and verifying eligibility before the March 22 deadline, businesses can avoid costly mistakes and ensure accurate ERC claims. For additional guidance on claiming the Employee Retention Credit, businesses are encouraged to consult IRS resources or seek assistance from qualified tax professionals.
