The IRS recently released a new press release detailing five new warning signs for businesses claiming the Employee Retention Credit (ERC). With 100s of pages of rules, the ERC can be complex to navigate. The IRS has emphasized the importance of avoiding errors, especially in light of the tens of thousands of fraudulent claims identified by the IRS and the ongoing moratorium placed on processing existing claims.

1. Essential Businesses That Fully Operated Without Modifications

Warning Sign: Businesses that could fully operate without needing to modify their operations did not experience a decline in gross receipts and, therefore, may not qualify for the ERC.

Key Consideration: Essential businesses that were not subject to government mandates, or could could operate fully without any modifications are not eligible to claim the ERC. However, it’s crucial to assess whether government mandates were applicable, and if so, the impact compliance with these mandates has on your business. Did these mandates result in a full or partial suspension of your business operations? Document any changes or suspensions that were mandated and how they impacted your business.

2. Insufficient Proof of Government Order Impact

Warning Sign: Businesses unable to support claims of how a government order fully or partially suspended their operations may face scrutiny.

Key Consideration: Ensure you have contemporaneous documentation that demonstrates the specific government orders that affected your business. At a minimum, this ought to include payroll records. Best practice is to provide documentation that details how the mandates restricted your ability to provide goods or services in the ordinary course of business.

3. Reporting Family Member Wages as Qualified Wages

Warning Sign: Calculating errors when reporting family member wages as qualified wages for the ERC.

Key Consideration: Any individual related to the majority owner of the business is not eligible for the ERC. Carefully review your wage calculations to ensure compliance with this rule, including in-laws, cousins, half-brothers, stepchildren, and anyone else related by blood or marriage. 

4. Using Wages Already Claimed for PPP Loan Forgiveness

Warning Sign: Businesses using wages already applied for Paycheck Protection Program (PPP) loan forgiveness are ineligible for the ERC.

Key Consideration: If the Small Business Administration (SBA) forgave your PPP loan, those wages cannot be used to calculate qualified wages for the ERC. Additionally, wages claimed under the Families First Coronavirus Response Act (FFCRA) are also ineligible. Review and adjust your calculations to exclude these wages from your ERC claim. If you have mistakenly included them, there are correction programs available.

5. Large Employers Claiming Wages for Service-Providing Employees

Warning Sign: Large employers with more than 100 full-time employees in 2019 claiming ERC for 2020 tax periods, or more than 500 full-time employees in 2019 claiming ERC for 2021 tax periods.

Key Consideration: full-time equivalency calculations can be tedious and time-consuming. Ensure you are not claiming wages for employees who provided services if your business falls into these categories. But also ensure you are not leaving legitimate credits based on incorrect employee counts. Verify your employee count and wage calculations against the ERC eligibility criteria.

If you believe you have filed an ERC claim in error, there are programs available to withdraw and correct your submission. The IRS urges businesses to maintain thorough documentation of any modifications made and how government mandates affected their operations. This documentation is critical in making a strong case for your ERC eligibility.

Navigating the ERC can be challenging, but understanding these new IRS warning signs can help businesses avoid common errors. By carefully documenting government mandates, ensuring accurate wage calculations, and correcting any mistakes promptly, businesses can ensure their ERC claims are compliant and reduce the risk of denial. For more detailed guidance and support, consider consulting with a tax professional or an expert in ERC claims to navigate this complex process effectively.

Disclaimer: We want to remind you that while we do have expert tax attorneys and tax professionals working on our team and for our clients, this blog is not legal or tax advice. But we do want to help. Reach out and schedule a time to speak with me or one of my teammates to review your unique set of facts and circumstances and see how we might be able to help you.

If you have any questions or think you may be eligible, click here to schedule your assessment.