ERC Warning: IRS Cracks Down on Improper Claims – What Payroll Professionals and Accountants Must Do Now

The IRS recently announced significant progress in processing Employee Retention Credit (ERC) claims, with about 400,000 claims under review, representing $10 billion in eligible refunds. This update comes as businesses nationwide, particularly small businesses, continue to face the aftershocks of the COVID-19 pandemic and the complex tax landscape that emerged during that period.

The Importance of the ERC for Employers

The ERC was introduced as a lifeline for businesses during the pandemic, offering financial relief to those who kept employees on payroll despite economic hardships. However, this tax credit has since become a point of contention due to the influx of improper and ineligible claims, many of which were driven by aggressive and often misleading marketing by third-party promoters. For employers, this means navigating the ERC has become more complex, and the IRS’s latest update underscores the importance of ensuring claims are accurate and legitimate.

What Does This Mean for Employers?

The IRS’s focus on separating legitimate claims from ineligible ones should be a wake-up call for employers who claimed the ERC. The agency is not only processing valid claims but also ramping up audits and investigations into fraudulent or incorrect filings. Employers who have already claimed the ERC should carefully re-examine their eligibility to avoid penalties and interest associated with incorrect claims. If a claim was filed erroneously, now is the time to act.

Key Actions Employers Should Take:

Recheck Eligibility Requirements The IRS has made it clear that many improper claims were driven by confusion or misleading promotions. Employers should revisit the eligibility criteria for the ERC to ensure that their claims were justified. The IRS’s ERC Eligibility Checklist can be a helpful tool in this process, as it outlines key eligibility requirements, including the impact of COVID-19 on operations and employee retention.

Utilize the Voluntary Disclosure Program (VDP) If you’ve already claimed the ERC and suspect your claim may be incorrect, the IRS has reopened its Voluntary Disclosure Program, which runs until November 22, 2024. This program allows businesses to rectify improper claims without facing penalties or interest, offering a 15% reduction on repayment amounts. By participating in this program, employers can avoid the risk of audits, penalties, and legal actions in the future.

Third-Party Payor Involvement Many employers used third-party payers (TPPs) to file their ERC claims, and if you fall into this category, it’s critical to communicate with your TPP to ensure your claim was filed accurately. The IRS has implemented a consolidated claim process to allow TPPs to correct or withdraw specific clients’ claims, which can expedite the resolution of improper claims.

Be Aware of Red Flags from Aggressive Promoters The IRS continues to emphasize that many businesses were misled by promoters who pitched the ERC under different names—such as “grants” or “business stimulus payments”—long after the pandemic. Employers should be cautious of any marketing or consultancy that pushes ERC claims without thoroughly explaining eligibility criteria. If your business was approached by one of these promoters, it’s crucial to review the claim and consult a trusted tax advisor.

Proactively Correct Improper Claims Businesses that have already received ERC refunds but are now questioning their eligibility should take immediate steps to correct these claims through the Voluntary Disclosure Program. By doing so, employers can avoid further penalties, interest, or the potential of full repayment down the line.

Conclusion

The IRS’s ongoing efforts to process legitimate ERC claims are crucial for small businesses that rely on these refunds. However, employers must be vigilant and proactive in ensuring their claims are accurate. Rechecking eligibility, correcting improper claims through the Voluntary Disclosure Program, and consulting trusted professionals are essential steps to protect your business from future penalties and audits. The time to act is now.

Stay tuned for more updates as we continue to monitor the IRS’s work on ERC claims and other relevant payroll tax matters.

Source : IR-2024-263, Oct. 10, 2024