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What is the IRS warning about ERC?

The IRS Warning on Employee Retention Credit (ERC) Claims: What You Need to Know


The Employee Retention Credit (ERC) was a lifeline for many businesses during the COVID-19 pandemic, but, it’s also become a source of concern for the IRS. So, what’s the deal? The IRS is warning about questionable ERC claims, and if you’ve claimed the credit, you need to pay attention.

The ERC: A Quick Refresher

Before we dive into the IRS warning, let’s quickly recap what the ERC is. The ERC was a refundable tax credit designed to encourage businesses to keep employees on their payroll during the pandemic. Eligible employers could claim a credit for a portion of qualified wages paid to employees between March 13, 2020, and September 30, 2021.

The IRS Warning: Seven Red Flags

Now, the IRS has identified seven red flags that could indicate an ERC claim is questionable:

1. Too Many Quarters Being Claimed

Some promoters have urged employers to claim the ERC for all quarters, but, qualifying for all quarters is uncommon. If you’ve claimed the credit for every single quarter, that could raise eyebrows.

2. Government Orders That Don’t Qualify

Certain promoters have claimed that any government order related to COVID-19 qualifies an employer for the ERC, but, that’s not true. The order must have specifically impacted your business operations.

3. Too Many Employees and Wrong Calculations

Be cautious about claiming the ERC for all wages paid to every employee. The rules vary based on your business size and the specific circumstances.

4. Business Citing Supply Chain Issues

A supply chain disruption alone doesn’t qualify you for the ERC. There must be a more direct impact on your operations.

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5. Business Claiming the ERC for Too Much of a Tax Period

It’s possible, but uncommon, to qualify for the entire quarter if operations were fully or partially suspended. More likely, you’d only qualify for the specific period of suspension.

6. Business Did Not Pay Wages or Did Not Exist During the Eligibility Period

You can only claim the ERC for wages you actually paid during the eligible periods when your business was operational.

7. Promoter Says There’s Nothing to Lose

Beware of promoters who claim there’s no risk in claiming the ERC. There could be penalties, interest, and costs associated with an incorrect claim.

What Should You Do?

If any of these red flags apply to your ERC claim, it’s time to take action:

1. Review Your Eligibility

Go back and carefully review the ERC eligibility requirements. Consult a tax professional if needed to ensure you truly qualified.

2. Consider the IRS Programs

The IRS has introduced two programs to help businesses resolve questionable ERC claims:

The Withdrawal Option

If you haven’t received your ERC payment yet, or if you have but haven’t cashed the check, you can withdraw your claim without penalty.

The Voluntary Disclosure Program (VDP)

If you’ve already received and cashed an ERC payment you may not have qualified for, you can apply for the VDP by March 22, 2024. Under this program, you’ll need to repay 80% of the credit, but the IRS will waive penalties and interest.

3. File Amended Returns

If you claimed the ERC, you’ll need to amend your 2020 and/or 2021 tax returns to reduce your wage expense deductions by the amount of the credit claimed.

4. Consider a Protective Income Tax Refund Claim

To avoid getting caught in a situation where you’ve paid tax on the ERC but the IRS denies your claim, consider filing a protective income tax refund claim.

The Bottom Line

The ERC was a valuable lifeline for businesses during the pandemic, but, the IRS is cracking down on questionable claims. If any of the seven red flags apply to your situation, take action immediately. Review your eligibility, consider the IRS programs, file amended returns, and potentially file a protective refund claim. And, most importantly, consult a tax professional to ensure you’re handling your ERC claim correctly.

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