7 Tell-Tale Signs Your ERC Claim Could be a Mistake

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As the March 22 deadline approaches for the Employee Retention Credit (ERC)'s Voluntary Disclosure Program (VDP), the IRS has provided a list of seven warning signs for taxpayers contemplating participation in the program.  

The VDP was established in response to aggressive and misleading marketing of the ERC program, which led to oversimplified eligibility rules. This initiative assists businesses that unintentionally filed erroneous claims and received payments, allowing them to repay only 80% of the claim and avoid penalties and interest through the IRS's special program. 

The Red Flags 

Curious about whether you should participate in the VDP? Here are some common red flags of unqualified ERC claims to consider in light of the looming deadline: 

  1. Excessive Quarters Claimed: Some promoters advise claiming the ERC for all available quarters, but this is uncommon and often an indicator of an incorrect claim. Employers are advised to carefully assess eligibility for each quarter. 
  2. Non-Qualifying Government Orders: Misinformation suggests claiming the ERC based on any government order in place in a claimant’s area, even if operations were unaffected. The frequently asked questions about the ERC Qualifying Government Orders has helpful examples to determine if your unique situation qualifies.  
  3. Inaccurate Employee Numbers and Calculations: Employers should exercise caution when claiming the ERC for all wages paid to employees on payroll, considering changes in laws throughout 2020 and 2021. Detailed calculations are necessary, with attention to dollar limits and varying credit amounts to prevent overclaiming. For details about credit amounts, see the Employee Retention Credit - 2020 versus 2021 Comparison Chart
  4. Supply Chain Disruption Misuse: Qualifying for the ERC due to a supply chain disruption is rare; to do so, employers must ensure their supplier's government order aligns with requirements. Employers should carefully review the rules on supply chain issues and examples in the 2023 legal memo on supply chain disruptions
  5. Excessive Claiming for a Tax Period: Claiming the ERC for an entire calendar quarter is uncommon; businesses partially suspended due to a government order can only claim for wages paid during the suspension period, not the entire quarter. Businesses should revisit their claim for overstated qualifying wages and keep supporting payroll records handy.  
  6. Wage Non-Payment or Ineligibility Period Existence: The ERC can only be claimed for periods when wages were paid. Claims for periods without employees or before obtaining an employer identification number are being disallowed by the IRS. 
  7. Promoters’ “Risk-Free” Assurances: Businesses should be cautious of promoters assuring no risks in claiming the ERC. Incorrect claims may lead to repayment obligations, penalties, interest, audits and potential expenses for resolution. 

Given the complexity of the ERC, the IRS advises claimants to avoid engaging with individuals who don't request detailed business documentation, especially payroll records. Seeking assistance from reputable business tax pros, such as those at Doeren Mayhew, is strongly recommended for a secure ERC claim process.

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