Decoding the ERC Dilemma: IRS Unveils 7 Warning Signs for Employee Retention Credit Claims – Act Now for Compliance

The ERC, often referred to as the Employee Retention Tax Credit (ERTC), emerged as a response to the economic uncertainties triggered by the COVID-19 pandemic. It offers eligible employers a tax credit for qualified wages paid to employees during specific periods. While designed to provide much-needed financial relief, the complexity of ERC has led to a surge in questionable claims, prompting the IRS to issue warnings and establish correction mechanisms.

Unveiling the 'Suspicious Seven' Warning Signs

1.????? Claiming Too Many Quarters: Promoters advising businesses to claim ERC for every available quarter should be approached with caution. Qualifying for all quarters is uncommon, and this could signal an incorrect claim. Meticulous review of eligibility for each quarter is strongly recommended.

2.????? Misinterpreting Government Orders: Some ERC promoters may advocate claiming the credit based on any government order, irrespective of its impact on operations. To qualify under government order rules, the order must have been in effect, and the employer's operations must have been fully or partially suspended during the claimed period due to the COVID-19 pandemic.

3.????? Scrutinizing Employee Count and Calculations: It is important for employers to be cautious when asserting the Employee Retention Credit (ERC) for the total wages disbursed to each employee. Given the legislative modifications in 2020 and 2021, coupled with fluctuations in credit amounts and monetary thresholds, it is essential to conduct thorough calculation assessments to prevent any instances of overclaiming.

4.????? Baseless Supply Chain Claims: Qualifying for ERC based on supply chain disruptions is a rarity. Employers need to ensure their supplier's government order aligns with the ERC requirements. A detailed review of the rules on supply chain issues is essential.

5.????? Claiming ERC for Extended Periods: Claiming ERC for an entire calendar quarter is uncommon unless operations were fully or partially suspended due to a government order. Employers in such situations can only claim ERC for wages paid during the suspension period, not the entire quarter.

6.????? Invalid Wages or Nonexistent Business During Eligibility Period: ERC can only be claimed for periods when wages were paid. The IRS is actively addressing claims where records indicate no employees or ERC claims for periods before the business had an employer identification number.

7.????? Unreliable Promoters: Businesses should be cautious of promoters downplaying the risks, claiming there's "nothing to lose" by filing for ERC. Incorrect claims can lead to repayment requirements, penalties, interest, audits, and additional expenses.

Why Act Now: The ERC Voluntary Disclosure Program

With the clock ticking and a March 22, 2024, deadline approaching, businesses that filed ERC claims in error and received payments have a unique opportunity. The ERC Voluntary Disclosure Program allows eligible participants to rectify their claims by repaying just 80% of the claimed amount. For those whose claims haven't been processed, a thorough review is imperative, and if found ineligible, businesses should pursue the claim withdrawal process.

Proactive Strategies to Mitigate Risks:

• Engage with Trusted Tax Professionals: A critical step in navigating the ERC landscape is partnering with reputable tax professionals. Their expertise can help businesses assess eligibility, review calculations, and navigate the evolving ERC guidelines.
• Leverage IRS Resources: The IRS provides an ERC Eligibility Checklist and Frequently Asked Questions. These resources offer valuable insights into ERC qualifications, documentation requirements, and potential pitfalls.
• Stay Informed and Compliant: The ERC is dynamic, with eligibility criteria changing across different periods. Staying informed about updates, guidelines, and potential risks is essential for businesses aiming for ERC compliance.

Educational Resources and Tools:

The IRS's Frequently Asked Questions on ERC serve as a gateway to additional resources and examples. Additionally, the interactive ERC Eligibility Checklist, available as a printable guide, aids tax professionals and businesses in assessing potential eligibility.

ERC Eligibility Highlights:

The ERC is available to eligible employers that paid qualified wages to employees after March 12, 2020, and before Jan. 1, 2022. Qualifications and the credit awarded differ based on the timing of the business's impacts. Notably, the ERC is not available to individuals.

• For 2020 and the First Two Quarters of 2021: Qualification based on trade or business operations fully or partially suspended due to a government order. Encountered the necessary decrease in gross income.
• For the Third Quarter of 2021: Qualification under government order rules or a required decline in gross receipts. Considered a recovery startup business.
• For the Fourth Quarter of 2021: Eligibility limited to recovery startup businesses.

Conclusion:

In a landscape rife with complexities, the ERC serves as a crucial tool for businesses striving to navigate the financial challenges posed by the pandemic. Understanding the 'Suspicious Seven' warning signs is not just a compliance necessity but a strategic move to safeguard businesses from potential repercussions. Proactive engagement with trusted tax professionals, leveraging IRS resources, and staying informed are the cornerstones of successfully unlocking the benefits of the ERC. As the March 22 deadline approaches, businesses have a unique opportunity to rectify claims and position themselves for financial resilience. Stay vigilant, stay informed, and let's navigate the ERC landscape together.