At CPA Nerds, we want to keep you in the loop about the latest updates from the IRS on the Employee Retention Credit (ERC). After reviewing the claims they’ve been processing, the IRS recently added some new red flags pointing to potential ERC claims issues. Businesses need to be aware of these warning signs to avoid audits, penalties, or having to pay back credits. Let’s examine these new warnings and what you can do if your business makes an incorrect ERC claim.

Five New Warning Signs of Incorrect ERC Claims

The IRS has identified five new red flags commonly seen in ERC claims that are inconsistent with the rules established by Congress:

  1. Essential Businesses Operating Without a Decline in Gross Receipts: Many essential businesses continued to operate during the pandemic without experiencing a significant decline in gross receipts. Despite this, promoters advised some businesses to claim the ERC incorrectly. Eligibility rules specify that essential businesses not fully or partially suspended by a qualifying government order are not eligible for the ERC. Simple adjustments, like requiring employees to wash hands or wear masks, do not count as a suspension of business operations.
  2. Insufficient Evidence of Government-Ordered Business Suspensions: To qualify for the ERC under the suspension rules, a business must be able to demonstrate that a government order fully or partially suspended its operations. The IRS has found that many companies need to provide adequate proof of how these orders impacted their operations, leading to incorrect claims.
  3. Improper Reporting of Family Members’ Wages as Qualified Wages: The IRS disqualifies wages paid to related individuals from being considered qualified wages for the ERC. This includes wages paid to various family members, such as spouses, children, siblings, parents, and in-laws. Those claims are likely incorrect if your business claimed the ERC using wages paid to these individuals.
  4. Double-Dipping with Paycheck Protection Program (PPP) Loan Forgiveness: Some businesses have mistakenly claimed the ERC on wages already used to secure the forgiveness of a PPP loan. Under the rules, wages reported for PPP loan forgiveness cannot be used to calculate the ERC. This is a standard error that needs to be corrected to avoid penalties.
  5. Large Employers Erroneously Claiming Wages for Active Employees: Special rules apply to large employers—those with more than 100 full-time employees in 2019 for 2020 or more than 500 full-time employees for 2021 tax periods. These employers can only claim the ERC for wages paid to employees who are not providing services. Claims that include wages paid to active employees are not eligible under ERC rules.

Steps to Resolve Incorrect ERC Claims

If you suspect your business has incorrectly claimed the ERC based on any warning signs above, acting quickly is essential. Here are the steps you can take to resolve the situation:

  1. ERC Claim Withdrawal Program: The IRS offers an ERC Withdrawal Program for businesses with unprocessed claims. By participating, your business can withdraw the ERC claim as if it was never filed, thus avoiding potential penalties, interest, and further scrutiny.
  2. Amending a Return: If your claim has already been processed, you can amend your tax return to correct the ERC amount. This step will help ensure compliance and reduce the risk of additional penalties.
  3. ERC Voluntary Disclosure Program: The IRS has reopened it, allowing businesses to correct their claims voluntarily. This program offers a way to rectify errors and reduce the likelihood of further issues, including audits.

Get Help from CPA Nerds With Employee Retention Credit

Navigating the ERC can be complex, especially with evolving IRS guidelines and expanded lists of red flags. If your business has claimed the ERC, reviewing your eligibility carefully against the latest IRS criteria is crucial. Should you identify any inconsistencies in your claim, consider the corrective options provided by the IRS to mitigate potential consequences. If you have questions about your situation or need personalized advice, please contact us at CPA Nerds. Our team of experienced CPAs is here to help you navigate the complexities of Michigan’s tax laws.