After a recent uptick in non-compliance, the IRS has issued five new warning signs for businesses filing Employee Retention Credit (ERC) claims. These new red flags complement the seven issues the IRS previously outlined back in February 2024 and apply to businesses with pending claims for eligibility, as well as those with previously approved claims. 

Since June 2024, the IRS has digitized and analyzed around 1 million ERC claims totaling over $86 billion and has been working to deny those with clear signs of ineligibility. It is also reviewing many potentially incorrect claims and processing valid low-risk claims.  

The New Warning Signs 

1. Essential businesses that could operate and didn’t have a decline in gross receipts: Many essential businesses, which were not affected by full or partial suspensions during the pandemic, were incorrectly advised to claim the ERC by promoters. 

2. Insufficient proof a government order suspended business operations: Businesses failed to provide adequate evidence of how a government order had legitimately halted their operations. 

3. Reporting relatives’ wages as qualified wages: Claims made using wages paid to family members of business owners are likely incorrect, as such wages are not eligible for the ERC. Relatives are the majority owner and their: 

• Spouse 
• Child (or descendant of a child) 
• Brother, sister, stepbrother or stepsister 
• Father, mother or ancestor of either 
• Stepfather or stepmother 
• Niece, nephew, aunt or uncle 
• Son/daughter-in-law, father/mother-in-law or brother/sister-in-law 
• Household member, or individuals who have the same principal abode as the majority owner and is a member of their household 

4. Paycheck Protection Program (PPP) overlap: Businesses cannot claim the ERC on wages also used to obtain loan forgiveness under the PPP. 

5. Large employers claiming wages for working employees: Large employers can only claim the ERC for wages paid to employees not providing services during the period in question, but many claims incorrectly included wages for employees who were working. 

How to Resolve Incorrect ERC Claims 

Acting quickly to correct falsified claims is key to avoiding potential audits, repayments, penalties and interest charges. Businesses who believe they have mistakenly submitted a claim should withdraw their unprocessed claims and amend previous filings.  

In the near future, the IRS has indicated it will announce additional steps to address improper ERC claims, including a short-term reopening of its Voluntary Disclosure Program and updates on processing low-risk payments for legitimate claims.  

Doeren Mayhew’s business tax pros stand ready to help you navigate through the ERC claim process if you believe your claim is mistaken.