In the wake of the COVID-19 pandemic, the Employee Retention Credit (ERC) emerged as a crucial financial support for businesses navigating unprecedented challenges. However, with the IRS increasing scrutiny on ERC claims, it’s essential for businesses to be aware of five new warning signs to avoid costly mistakes. Understanding these red flags is key to ensuring compliance and protecting your business from audits, penalties, and interest.
Understanding the Employee Retention Credit (ERC)
The ERC was introduced to help businesses that continued paying employees during pandemic-related shutdowns or significant declines in gross receipts. Despite its intended support, aggressive promoters have led some businesses to claim the credit without meeting the necessary eligibility requirements. The IRS’s recent updates highlight common errors to help businesses avoid pitfalls and maintain compliance.
Five New Warning Signs to Watch For
- Essential Businesses Claiming ERC
Many essential businesses that operated fully during the pandemic were encouraged to claim the ERC. However, eligibility often requires a full or partial suspension of operations due to a qualifying government order. Essential businesses should reassess their claims to ensure they meet the specific criteria. - Insufficient Proof of Suspension
To qualify for the ERC, businesses must provide documentation showing how a government order fully or partially suspended their operations. Without proper proof, claims may be deemed ineligible. Ensure your records are complete and accurately reflect the impact of any government orders on your business operations. - Family Members’ Wages
Claims involving wages paid to family members or related individuals are often incorrect. Business owners should carefully verify their claims to ensure these wages are excluded. Incorrectly including these wages can lead to inaccuracies and potential penalties. - Overlap with PPP Loan Forgiveness
The ERC cannot be claimed on wages already used for Paycheck Protection Program (PPP) loan forgiveness. It’s crucial to review your filings to ensure that there is no overlap between ERC claims and PPP loan forgiveness. This common error can result in significant compliance issues. - Large Employers’ Service Wages
Large employers can only claim the ERC for wages paid to employees who are not providing services. Claims that include wages for active employees are likely incorrect. Review your claims to ensure they align with this requirement to avoid potential errors.
Avoiding Other Common Pitfalls
In addition to these new warning signs, businesses should be aware of other issues previously highlighted by the IRS:
- Claiming Too Many Quarters: Ensure that your claims are accurate and reflect the correct number of quarters.
- Miscalculating Employee Numbers: Double-check calculations to avoid errors in the number of employees reported.
- Citing Non-Qualifying Government Orders: Verify that all cited government orders meet the eligibility criteria for ERC claims.
Be cautious of promoters who downplay the risks associated with incorrect claims. Properly understanding and addressing these issues can prevent future complications.
Taking Action to Ensure Compliance
Navigating ERC claims can be complex, so it’s advisable for businesses to consult with trusted tax professionals. If errors are found, the IRS offers options such as the claim withdrawal program and the ERC Voluntary Disclosure Program. These programs allow businesses to correct incorrect claims without severe repercussions.
Moving Forward
As the IRS continues to refine its oversight of the ERC, businesses must stay informed and vigilant. By understanding and addressing these warning signs, you can ensure that your ERC claims are accurate and compliant. Protect your business from potential audits and penalties by seeking expert guidance.
For personalized assistance and peace of mind, don’t hesitate to reach out to our office with any questions or concerns about your ERC claims. We’re here to help you navigate these complexities and ensure your business remains on track.
