Taxpayers Could Face Penalties, Interest, and Audits If Claims Are Found to Be Erroneous
The Internal Revenue Service (IRS) is stepping up its rhetoric regarding potentially fraudulent Employee Retention Credit (ERC) claims, urging businesses to withdraw erroneous claims before the IRS reviews them and issues penalties.
Today, the IRS shared “five new warning signs” pointing to problematic ERC claims. These warning signs augment the seven areas the IRS previously highlighted in order to educate potential claimants of likely problems with their ERC claims. The IRS encouraged anyone who identifies these warning signs in their claims to contact a trusted tax professional and “consider using the special ERC Withdrawal Program.”
The five newly announced warning signs of incorrect ERC claims include:
- Essential businesses during the pandemic that could fully operate and didn’t have a decline in gross receipts.
- Businesses unable to support how a government order fully or partially suspended business operations.
- Businesses reporting family members’ wages as qualified wages.
- Businesses using wages already used for Paycheck Protection Program loan forgiveness.
- Large employers claiming wages for employees who provided services.
Last month, the IRS announced that it would resume processing “low-risk” ERC claims, ending a moratorium on processing ERC claims that had been in place since last September. While the announcement was good news for some taxpayers, the IRS also stated that they planned to deny a majority of claims that had been submitted on the grounds that they present an “unacceptable level of risk.” Today’s announcement reminds taxpayers that those high-risk claims are being looked at with intensified scrutiny.
The announcement from the IRS today also cautions businesses with previously approved claims to heed these new warnings and take “corrective action” if a claim exhibits one of the characteristics identified as problematic. The service made it clear that previously approved claims would still be evaluated for fraud as they process the remaining claims.
The IRS foreshadowed announcements in “the coming days” that will detail further compliance work involving so-called “high-risk ERC claims,” along with information about a temporary reopening of the Voluntary Disclosure Program.
In order to begin paying as many low-risk claims as possible, the IRS also indicated that it would approve and process certain ERC claims for quarters where eligibility for the credit is clear, even while they continue to evaluate additional quarters in the same claim.
Tax advisers who specialize in ERC claims and ERC processing companies, often referred to as “tax promoters” by the IRS, continue to be a target of IRS compliance efforts. IRS Commissioner Danny Werfel said, “As we prepare for the next major announcement, we want businesses to be aware of common errors our compliance teams are seeing, many of which reflect bad advice coming from promoters.”
ERC Background
The ERC, created under the CARES Act to assist businesses that continued to pay their employees during the COVID-19 pandemic, is a refundable tax credit that allows employers to offset their employment taxes against a percentage of qualified wages paid to employees. Eligible taxpayers can claim the ERC on an original or amended employment tax return for an eligible period between March 13, 2020, and December 31, 2021. To qualify for the ERC, a business must meet one of the following three criteria:
- Experienced a full or partial suspension of operationsresulting from a government order issued due to the COVID-19 pandemic during 2020 or the first three quarters of 2021;
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021as defined by the criteria set forth in the appropriate IRS guidance (Notice 2021-20 for 2020 and Notice 2021-23 for 2021);
- Qualified as a recovery startup businessfor the third or fourth quarters of 2021 as defined in Notice 2021-49.
Since October 2022, the IRS has been warning taxpayers to be wary of dubious ERC schemes. Last March, the IRS issued IR-2023-49, placing abusive ERC schemes at the top of its 2023 list of “Dirty Dozen” transactions. In September 2023, the IRS imposed a moratorium on processing ERC claims, which it partially lifted in June 2024.
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