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IRS Issues Warning Signs for Questionable Employee Retention Credit (ERC) Claims

The Internal Revenue Service (IRS) has flagged warning signs to help small businesses identify potential issues with their Employee Retention Credit (ERC) claims ahead of a key March deadline. The ERC, designed to aid businesses during the pandemic, has faced misleading promotions, prompting the IRS to provide a list of seven suspicious signs that may indicate an incorrect claim.

Suspicious Signs of Incorrect Claims

  1. Too Many Quarters Claimed: Some promoters advise claiming ERC for all available quarters, which is uncommon and may signal an incorrect claim. Businesses should review eligibility for each quarter carefully.

  2. Government Orders that Don't Qualify: Misinformation suggests claiming ERC based on any government order, even if operations weren't affected. The IRS clarifies that the order must be due to the COVID-19 pandemic and result in full or partial suspension of operations.

  3. Too Many Employees and Wrong Calculations: Employers should be cautious about claiming ERC for all wages without considering changing laws throughout 2020 and 2021, varying credit amounts, and specific rules for qualified wages.

  4. Business Citing Supply Chain Issues: Qualifying for ERC based on a supply chain disruption is rare; employers must ensure their supplier's government order meets requirements.

  5. Claiming ERC for Too Much of a Tax Period: Businesses can't claim ERC for an entire quarter if operations were only partially suspended. ERC is only applicable for wages paid during the suspension period.

  6. Business Didn't Pay Wages or Didn't Exist During Eligibility Period: ERC can only be claimed for periods when wages were paid. Some businesses claimed ERC without having employees or before obtaining an employer identification number.

  7. Promoter Claims Nothing to Lose: Businesses should be wary of promoters claiming there's nothing to lose by filing an ERC claim. Incorrect claims risk repayment, penalties, interest, and potential audit expenses.

With the March 22, 2024, deadline approaching for the ERC Voluntary Disclosure Program, businesses that mistakenly claimed ERC can repay 80% of the amount. The IRS encourages prompt review and withdrawal if claims are ineligible to avoid penalties and interest.

Eligible employers should consult reputable tax professionals for ERC claims, avoiding promoters who don't request detailed business records. The IRS provides an ERC Eligibility Checklist and resources for businesses to verify eligibility and understand the complex rules associated with the credit.

Tax Preparer Implications

The information provided above has several implications for tax preparers:

  1. Increased Scrutiny and Compliance: Tax preparers should be aware that the IRS is intensifying compliance activities related to Employee Retention Credit (ERC) claims. This means tax preparers need to exercise due diligence in ensuring that their clients' ERC claims are accurate and compliant with the eligibility criteria.

  2. Awareness of Warning Signs: Tax preparers should familiarize themselves with the seven suspicious signs outlined by the IRS regarding potentially incorrect ERC claims. This awareness can help them identify problematic claims early in the preparation process and address any issues before filing.

  3. Guidance to Clients: Tax preparers play a crucial role in guiding their clients through the ERC claim process. They should advise clients to review their eligibility for each quarter, ensure compliance with government orders, calculate credits accurately, and refrain from making claims based on misleading information.

  4. Utilizing Resources: The IRS provides resources, including an ERC Eligibility Checklist and interactive tools, to help tax preparers and their clients understand the complex rules associated with ERC. Tax professionals should leverage these resources to ensure accurate and compliant filings.

  5. Participation in IRS Programs: Tax preparers may need to assist clients in participating in the ERC Voluntary Disclosure Program if they discover that an ERC claim was made in error. This involves helping clients repay the incorrect claim, possibly at a reduced rate of 80%, before the March 22, 2024, deadline.

  6. Communication with Clients: Tax preparers should communicate effectively with clients, emphasizing the importance of reviewing ERC claims promptly to avoid penalties, interest, and potential audit-related expenses. This includes educating clients about the risks associated with incorrect claims and the benefits of participating in the voluntary disclosure program.

In summary, tax preparers must stay informed about the IRS's heightened focus on ERC claims and proactively assist clients in navigating the eligibility criteria and potential pitfalls associated with the credit. Being vigilant, communicating effectively, and leveraging available resources will help tax preparers ensure compliance and minimize risks for their clients.


Disclaimer: This article is for informational and educational purposes only and does not constitute legal tax advice. Advanced Tax Solutions is not liable or responsible for any damages resulting from or related to your use of this information. It is your responsibility to refer to official IRS documentation for information regarding any tax laws or tax information shown here.


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