Tax Tip 2024-72: IRS shares new warning signs of incorrect claims for Employee Retention Credit

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Issue Number: Tax Tip 2024-72

IRS shares new warning signs of incorrect claims for Employee Retention Credit

The IRS recently shared five new warning signs of incorrect claims by businesses for the Employee Retention Credit. The new list comes from common issues the IRS has seen while reviewing and processing ERC claims.

Aggressive promoters convinced many businesses to claim this pandemic-era credit when they’re not eligible. The IRS urges businesses to carefully review their filings to confirm their eligibility and ensure their claim doesn’t include these warning signs or other mistakes.

Businesses should talk to a trusted tax professional and resolve incorrect claims through the IRS’s claim withdrawal program or the second ERC Voluntary Disclosure Program to avoid issues such as audits, repayment, penalties and interest.

The five new red flags cover these areas:

• Essential businesses during the pandemic that could fully operate and didn’t have a decline in gross receipts. Promoters convinced many essential businesses to claim the ERC when, in many instances, essential businesses weren’t eligible because their operations weren’t fully or partially suspended by a qualifying government order.
• Businesses unable to support how a government order fully or partially suspended business operations. Whether a business was fully or partially suspended depends on its specific situation. When asked for proof on how the government order suspended more than a nominal portion of their business operations, many businesses haven’t provided enough information to confirm eligibility.
• Businesses 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.
• Businesses using wages already used for Paycheck Protection Program loan forgiveness. 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. Large eligible employers can only claim wages paid to employees who were not providing services. Many large employers’ claims incorrectly included wages for employees who were providing services during these periods.

The IRS previously issued warnings involving these seven areas:

• Too many quarters being claimed.
• Government orders that don’t qualify.
• Too many employees and wrong calculations.
  
• Businesses citing supply chain issues.
• Businesses claiming ERC for too much of a tax period.
• Businesses didn’t pay wages or didn’t exist during eligibility period.
• Promoter says there’s nothing to lose.

For details on all of these warning signs, check new and previously shared signs ERC claims may be incorrect.
Businesses can also use the IRS’s ERC Eligibility Checklist or review Frequently Asked Questions about ERC Eligibility to help identify incorrect claims.

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