The ERC, designed to support businesses that retained employees during the pandemic, has been subject to misuse, largely due to misinformation spread by certain promoters. These entities have encouraged businesses to claim the credit without proper eligibility, leading to an increase in compliance activities by the IRS.
IRS Commissioner Danny Werfel stressed the urgency of reviewing ERC claims. “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 ‘suspicious seven’ signs released today are clear red flags that ERC claimants should carefully review,” said Werfel.
The “Suspicious Seven” Warning Signs
- Claiming ERC for Too Many Quarters: It’s rare for a business to qualify for the credit across all available quarters. This could indicate an incorrect claim.
- Ineligible Government Orders: Claims based on government orders that did not affect the business operations directly or were voluntary suspensions may not qualify.
- Excessive Employee Counts and Incorrect Calculations: Businesses must adhere to specific rules and dollar limits when claiming ERC for wages paid to employees.
- Misguided Claims on Supply Chain Issues: Supply chain disruptions alone do not qualify a business for the ERC.
- Overstating the Qualifying Period: Businesses can claim ERC only for periods directly impacted by eligible government orders, not the entire tax period.
- Claims Without Paying Wages or Pre-Existence: ERC claims are invalid for periods when the business did not exist or did not pay wages.
- Promises of No Loss: Businesses should be wary of promoters claiming there is nothing to lose by applying for the ERC.
Resolving Incorrect ERC Claims
To address incorrect claims, the IRS introduced the ERC Voluntary Disclosure Program, allowing businesses to repay 80% of the erroneous claim amount by March 22, 2024. This opportunity provides a pathway for businesses to correct their claims without facing full repayment, penalties, or interest.
Businesses that have yet to receive their ERC payment or have received but not cashed their check have the option to withdraw their claim, potentially avoiding the need for repayment and additional penalties.
Seeking Professional Guidance
The complexity of the ERC criteria means that businesses should seek advice from reputable tax professionals to ensure their claims are valid. The IRS has made resources and tools available, including an interactive ERC Eligibility Checklist and detailed FAQs, to assist taxpayers in assessing their eligibility.
With the deadline looming, the IRS’s message is clear: take action now to review and, if necessary, correct ERC claims to avoid future financial and legal challenges. This proactive approach will help ensure that businesses can navigate post-pandemic recovery with confidence and compliance.
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