The Employee Retention Credit (ERC) was a crucial lifeline for businesses during the COVID-19 pandemic, offering significant tax relief to help retain employees. However, some businesses have made incorrect ERC claims, leading to potential issues with the Internal Revenue Service (IRS). The IRS strongly recommends that businesses take immediate action to correct any errors in their ERC claims to avoid interest, penalties, and even audits.
Correcting
If you suspect that your business has made an incorrect ERC claim, there are several steps you can take to resolve the issue. The IRS offers different avenues for correction, including:
- Voluntary Disclosure Program: This program allows businesses to voluntarily disclose any errors in their ERC claims. By doing so, you may mitigate penalties and avoid more severe consequences.
- Amending a Return: If you realize an error after filing, you can amend your return to correct the mistake. This option can help you avoid future issues, such as repayments with interest.
- Claim Withdrawal: In some cases, the IRS may allow you to withdraw a claim if it was filed incorrectly. This step can prevent the need for complex corrections down the line.
Taking proactive steps to correct an incorrect ERC claim is essential to minimize the risk of further complications.
Warning Signs
The IRS has identified several warning signs that indicate an ERC claim might be incorrect. Businesses should be cautious if they encounter any of the following scenarios:
- False Assurance from Promoters: If an ERC promoter claims there is nothing to lose by applying, be wary. Incorrect claims can lead to serious consequences, including repayments, interest, audits, and penalties.
- Nonexistent or Inactive Business: If your business did not pay wages or did not exist during the eligibility period, it is not eligible for the ERC.
- Overclaiming for a Tax Period: Some businesses mistakenly claim ERC for too many tax periods. This overextension can raise red flags with the IRS.
- Supply Chain Disruption: Qualifying for the ERC based on supply chain disruption is rare. Businesses should be cautious about relying on this justification.
- Too Many Employees: Claims involving an unusually large number of employees may be incorrect, particularly if the calculations are inaccurate.
Additional IRS Warnings
The IRS has further expanded its list of warnings, noting additional red flags that businesses should be aware of:
- Government Orders Misinterpretation: Some businesses incorrectly claim ERC based on government orders that did not impact their operations. Just because a government order was in place does not automatically qualify your business for the ERC.
- Claiming for Too Many Quarters: Qualifying for the ERC for all quarters is uncommon. Businesses should ensure they are only claiming for the periods during which they were truly eligible.
- Essential Businesses with No Revenue Decline: Businesses that were considered essential during the pandemic and did not experience a significant decline in gross receipts may not qualify for the ERC.
- Reporting Wages for Family Members: Reporting wages paid to family members as qualified wages for the ERC is generally not allowed.
- Inadequate Documentation: If a business cannot provide documentation to support how a government order partially or fully suspended its operations, its ERC claim may be challenged.
- Double-Dipping with PPP Loans: Using wages that have already been counted toward Paycheck Protection Program (PPP) loan forgiveness for the ERC is prohibited.
- Large Employers Claiming for Active Employees: Large employers cannot claim the ERC for wages paid to employees who provided services during the eligibility period.
Staying Compliant
Ensuring that your ERC claim is accurate and compliant with IRS regulations is crucial. If your business has made an incorrect claim, addressing the issue promptly through one of the recommended options can help you avoid serious repercussions. Being aware of the warning signs and knowing the eligibility criteria can prevent mistakes and ensure that your business remains in good standing with the IRS.
FAQs
What should I do if I made an incorrect ERC claim?
Consider using the Voluntary Disclosure Program, amending your return, or withdrawing the claim.
What are the risks of an incorrect ERC claim?
Incorrect claims can lead to repayments, interest, penalties, and audits.
Can I claim ERC for wages paid to family members?
No, wages paid to family members do not qualify for the ERC.
Are essential businesses eligible for the ERC?
Not usually, especially if they didn’t experience a revenue decline.
Can I claim ERC for all quarters during the pandemic?
No, claiming for all quarters is uncommon and may indicate an incorrect claim.
