Warning signs an ERC claim is questionable

February 14, 2024

By Martha Waggoner, for Journal of Accountancy

The IRS alerted small businesses to seven warning signs that could indicate that their employee retention credit (ERC) claim is questionable and to help them resolve issues before a March deadline for a special disclosure program.

The deadline for the ERC voluntary disclosure program for anyone who filed a claim in error and received a payment is March 22. This program allows a business to repay 80% of the claim, with the IRS forgiving the remaining 20%, which the employer may have paid to an ERC promoter.

Taxpayers who filed a claim that has not been processed should review the guidelines and use the claim withdrawal process if they now see that their claim is ineligible, the IRS said. Resolving an incorrect claim through the IRS's special programs will avoid penalties and interest.

"Many businesses were wildly misled about the qualifications, and the IRS is taking a special step to highlight common problems being seen about these claims," IRS Commissioner Danny Werfel said in the release. "The IRS urges ERC claimants to get with a trusted tax professional and review their qualifications before time runs out on IRS disclosure and withdrawal programs."

The ERC was designed for certain businesses to continue paying employees during the COVID-19 pandemic while their operations were either fully or partially suspended due to a government order or had a significant decline in gross receipts during the eligibility periods. It was generally available to eligible businesses from March 31, 2020, to Sept. 30, 2021, and to Dec. 31, 2021, for recovery startup businesses.

The IRS said it is focusing on these red flags as it reviews ERC claims:

  • Too many quarters being claimed. Some promoters have urged employers to claim the ERC for all quarters that the credit was available. Qualifying for all quarters is uncommon, and this could be a sign of an incorrect claim.
  • Government orders that don't qualify. Among the incorrect information that some promoters relayed was that employers could 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.
  • Too many employees and wrong calculations. Employers should be cautious about claiming the ERC for all wages paid to every employee on their payroll because the law changed throughout 2020 and 2021.
  • Business citing supply chain issues. A supply chain disruption by itself doesn't qualify an employer for the ERC, and qualification based on this reason is uncommon.
  • Business claiming the ERC for too much of a tax period. It's possible, but uncommon, for an employer to qualify for the ERC for the entire calendar quarter if 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 the ERC only for wages paid during the suspension period, not the whole quarter.
  • Business did not pay wages or did not exist during the eligibility period. Employers can only claim the ERC for tax periods when they paid wages to employees.
  • Promoter says there is nothing to lose. Businesses should be wary of a promoter who urged them to claim the ERC because they "have nothing to lose." Businesses that incorrectly claim the ERC risk repayment requirements, penalties, interest, audit, and potential expenses of hiring someone to help resolve the incorrect claim, amend previous returns, or represent them in an audit.

The IRS has led a wide-ranging campaign to curb ERC abuse that the Service blames on misleading marketing campaigns. In September, the Service announced a moratorium on processing new claims with no date set yet for the end of the pause.

As of mid-January, the IRS had 1.13 million ERC claims of which 792,000, or 71%, were received before the moratorium and 338,000, 29%, were received after the pause, an IRS spokesman said in an email. These are in addition to the 3.6 million returns already processed for about $230 billion.

Learn more about ERC eligibility

The IRS's frequently asked questions on the ERC include links to additional resources. The IRS has an interactive ERC Eligibility Checklist to use to check potential eligibility for the ERC. It's also available as a printable guide.

The AICPA has ERC resources and information for members so they can warn clients of red flags that could indicate that a vendor is dishonest and discourage dealings with ERC mills.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.



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