IRS issues more warning signs of bad ERC claims

Double-dipping on wage claims and saying masks disrupted operations are two of five red flags the Internal Revenue Service says it’s commonly seen on incorrect Employee Retention Credit claims by businesses.

The new items are in addition to seven problem areas the IRS previously highlighted. The agency has urged businesses with pending claims to carefully review their filings to confirm their eligibility and ensure credits claimed don’t include any of these 12 warning signs or other mistakes.

“We want businesses to be aware of common errors our compliance teams are seeing, many of which reflect bad advice coming from promoters,” said IRS Commissioner Danny Werfel, in a statement. “The IRS continues to urge people with pending claims or previously approved payments to talk to a trusted tax professional rather than a promoter and see if any of these red flags apply to them.” 

The newly announced signs are:

• Claims from essential businesses during the pandemic that could fully operate and didn’t have a decline in gross receipts. Modifications that didn’t affect an employer’s ability to operate, like requiring employees to wash hands or wear masks, doesn’t mean the business operations were suspended.
• Businesses that are unable to support how a government order fully or partially suspended business operations.
• Reporting family members’ wages as qualified wages. If business owners claimed the ERC using wages paid to related individuals, those claims are likely for the wrong amount or ineligible.
• Business using wages already used for Paycheck Protection Program loan forgiveness. If the Small Business Administration forgave a loan, businesses can’t claim the ERC on wages that they reported as payroll costs to get PPP loan forgiveness.
• Large employers claiming wages for employees who provided services. Special rules applied to large eligible employers, who can only claim wages paid to employees who were not providing services.

Previously shared signs of an incorrect ERC claim included too many quarters being claimed, government orders that don’t qualify, too many employees and wrong calculations, claims of an ERC for too much of a tax period, businesses that  didn’t pay wages or didn’t exist during the eligibility period, and supply chain problems, among others.
The IRS issued the new warning signs to give businesses and tax pros more time to prepare for new steps the agency is planning to counter improper ERC claims. In coming days, the IRS plans to issue more information on new compliance work involving high-risk ERC claims, as well as details about an anticipated short-term reopening of the Voluntary Disclosure Program and an update about impending processing of low-risk payments to help small businesses with legitimate claims.

Businesses with these red flags should talk to a trusted tax professional and consider using the ERC Withdrawal Program. Businesses with previously approved claims should also review the filings as the IRS intensifies compliance enforcement.

As the IRS begins to process additional lower-risk claims, businesses may receive payments for some valid tax periods, generally quarters, while the agency reviews other periods for eligibility.

The IRS said in June that it digitized and analyzed about 1 million ERC claims, representing more than $86 billion. Also in June, the agency said it will begin slowly paying some of its older claims for the credit after pressure from Congress but that it’s not formally lifting its moratorium on processing newer claims, as most of them are improper.