The Employee Retention Credit (ERC) is a refundable tax credit designed to encourage businesses to keep employees on their payroll during the COVID-19 pandemic. The credit is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and is available to businesses that have been financially impacted by COVID-19.
Eligible businesses can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and December 31, 2021. The credit is equal to 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. This means that the maximum ERC for qualified wages paid to any employee is $5,000.
The ERC is a powerful tool for businesses struggling with the financial fallout of the pandemic. However, it’s important to understand the rules and regulations surrounding this credit to avoid potential issues with the Internal Revenue Service (IRS).
The IRS’s Stance on ERC Claims
The IRS has issued a renewed warning, urging businesses to carefully review the ERC guidelines before attempting to claim the credit. This warning comes in response to a surge in aggressive promotions by certain firms, pushing ineligible businesses to file for the ERC.
The IRS is particularly concerned about businesses being misled by these promotions into making claims that they are not entitled to, which could result in audits and potential penalties. The agency has made it clear that it is committed to ensuring compliance with the tax laws and will take action against businesses that make false or fraudulent ERC claims.
The IRS’s Increased Scrutiny on ERC Claims
In response to the rising number of fraudulent ERC claims, the IRS has increased its scrutiny and enforcement efforts. The agency has added promoter claims involving the ERC to its annual “Dirty Dozen” list of tax scams.
The Dirty Dozen list is a compilation of common scams that taxpayers may encounter, particularly during the tax filing season. By including ERC-related scams in this list, the IRS is signaling its intent to crack down on fraudulent claims and hold those responsible accountable.
The Possibility of an IRS Denial for Your ERC Claim
While the ERC can provide significant financial relief for eligible businesses, it’s important to note that not all claims will be approved. The IRS may deny your claim if it determines that you do not meet the eligibility requirements or if it suspects fraudulent activity.
When the ERC was first enacted as part of the CARES Act, it received little attention because businesses that received a forgivable loan under the Paycheck Protection Program (PPP) were not eligible for the credit. However, subsequent legislation removed this restriction, leading to a surge in ERC claims and, unfortunately, an increase in fraudulent claims as well.
New IRS Guidance on ERC
In response to the confusion and questions surrounding the ERC, the IRS has issued new guidance to help businesses understand the credit and how to claim it. This guidance provides clear answers to common questions and clarifies the eligibility requirements for the credit.
The new guidance also addresses the issue of fraudulent claims and provides information on what businesses can do to protect themselves from scams. It’s crucial for businesses to review this guidance carefully before applying for the ERC to ensure they understand the rules and avoid potential issues with the IRS.
Understanding the Basic ERC Claim Requirements
Before claiming the ERC, it’s crucial to understand the basic requirements. These include the eligibility criteria, the calculation of the credit, and the necessary documentation.
To be eligible for the ERC, a business must have been operating during the calendar year 2020 and either:
- Hadits operations fully or partially suspended due to orders from a governmental authority related to COVID-19, or
- Experienced a significant decline in gross receipts (i.e., a decrease of more than 50% in a quarter compared to the same quarter in 2019).
The credit applies to qualified wages, which include salaries and health benefits. For businesses with more than 100 employees, only wages paid to employees for the time they were not providing services are eligible. For businesses with 100 or fewer employees, all wages paid during the period of economic hardship are eligible.
Spotting the ERC Red Flags to Avoid an Audit
To avoid an IRS audit, businesses should be aware of the red flags that could trigger one. These include aggressive advertising, direct mail solicitations, and online promotions involving the ERC. The IRS has been stepping up its audit and criminal investigation work involving bogus ERC claims.
Businesses should be wary of firms that promise guaranteed or inflated ERC amounts, charge contingent fees based on the amount of the credit, or fail to provide a clear explanation of the eligibility rules and calculation of the credit. These are all signs of potential scams.
Consequences of Improper ERC Claims
Businesses, tax-exempt organizations, and others considering applying for this credit need to carefully review the official requirements for this program before applying. Those who improperly claim the credit face follow-up action from the IRS.
The consequences of making an improper ERC claim can be severe. If the IRS determines that a claim is fraudulent, the business could be subject to penalties, including fines and imprisonment. Even if the claim is not fraudulent but simply incorrect, the business may have to repay the credit with interest and could be subject to additional penalties.
The Role of Promoters in ERC Claims
Aggressive promoters are wildly misrepresenting and exaggerating who can qualify for the credits. While the credit is real, businesses should be wary of these promoters and ensure they meet the eligibility criteria before applying.
Promoters often target small businesses that are desperate for financial relief. They use high-pressure sales tactics and make false promises about the amount of credit the business can receive. In many cases, these promoters charge high fees and leave the business to deal with the consequences when the IRS denies the claim or initiates an audit.
Conclusion: Navigating the ERC with Caution
The ERC can be a valuable tax incentive for businesses affected by the pandemic. However, with the IRS cracking down on improper claims, it’s crucial for businesses to understand the requirements, spot potential red flags, and navigate the process with caution to avoid costly audits.
Businesses should consult with a trusted tax advisor before applying for the ERC. A tax advisor can help the business understand the rules, calculate the credit correctly, and prepare the necessary documentation. With careful planning and guidance, businesses can take advantage of the ERC while minimizing the risk of an IRS audit.
References
- IRS cracks down on small business tax break that could lead to audit – CNBC – This scroll from the scribes at CNBC was our first beacon of light in the murky world of tax credits.
- IRS issues renewed warning on Employee Retention Credit claims; false claims generate compliance risk for people and businesses claiming credit improperly – IRS – Straight from the dragon’s mouth! This official proclamation from the IRS itself was a treasure trove of knowledge.
- IRS opens 2023 Dirty Dozen with warning about Employee Retention Credit claims; increased scrutiny follows aggressive promoters making offers too good to be true – IRS – Another gem from the IRS, this scroll warned us of the dangers lurking in the shadows.
- Will The IRS Deny Your Claim For The Employee Retention Tax Credit? – Forbes – The wise wizards at Forbes shared their insights on the trials and tribulations of claiming the ERC.
- Employee retention credit receives clarification from new IRS guidance – Plante Moran – Last but not least, the scholars at Plante Moran provided us with valuable clarifications on the mysteries of the ERC.