The IRS published a list of warning signs for businesses to help them identify whether they are eligible to claim a pandemic-era employee credit program.
First, the agency identified that several businesses deemed “essential” were filing for ERC claims. However, they were not eligible since their operations during the pandemic “weren’t fully or partially suspended by a qualifying government order,” the IRS noted.
“Modifications that didn’t affect an employer’s ability to operate, like requiring employees to wash hands or wear masks, doesn’t mean the business operations were suspended. The IRS urges essential businesses to review eligibility rules and examples related to government orders.”
Many firms were found not to have provided enough proof to prove that their operations were fully or partially suspended due to government orders.
In some ERC submissions, business owners were seen seeking claims for wages paid to family members.
“Wages paid to related individuals aren’t qualified wages for the ERC,” the agency stated.
ERC applicants who took a loan under the Paycheck Protection Program (PPP) could be ineligible if these loans were forgiven. Firms cannot claim ERC on wages if payroll costs were included to secure the PPP loan forgiveness.
Finally, entities classified as “large employers” cannot claim ERC for workers who were providing services during the pandemic period.
“Businesses with these indicators should talk to a trusted tax professional and consider using a special ERC Withdrawal Program that remains available,” the IRS said.
“Businesses with previously approved claims should also review the filings as the IRS intensifies compliance efforts in this area. Businesses should act soon to resolve incorrect claims and avoid future issues such as audits, repayment, penalties, and interest.”
Tackling Incorrect ERC Claims
In December, the agency announced a voluntary disclosure program that allowed businesses which filed false ERC claims to admit to the error. In exchange, entities were allowed to keep 20 percent of the ERC claims they incorrectly received and had to return the remaining 80 percent. The program ended on March 22.The agency’s Criminal Investigation department found that more than $2.8 billion worth of ERC claims could be fake. In March, the IRS said it “sharply” raised compliance actions on ERC claims via criminal probes and audits, with more planned for the future.
The tax agency noted that businesses could be in a worse cash position if forced to pay back improperly claimed ERC credits than if they had not claimed it in the first place.
The moratorium was ordered by IRS Commissioner Danny Werfel due to worries that third parties were aggressively pressuring ineligible businesses to file for ERC claims. Such third parties can charge hefty fees for services, which can go up to 25 percent of the ERC refund.
“The IRS is increasingly alarmed about honest small-business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in,” he said at the time.
“The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system. This harms all taxpayers, not just ERC applicants.”
