The 7 Suspicious Signs of an Incorrect ERC Claim

The Employee Retention Credit (ERC) is a tax credit provided by the U.S. government to encourage businesses to retain employees during challenging economic times, the most obvious being the COVID-19 pandemic. However, misuse of the program caused the Internal Revenue Service (IRS) to pause processing new claims last September. These bad actors taking advantage of the program were encouraging businesses to claim the ERC without actually meeting the criteria to do so—this has resulted in an uptick of compliance activities by the IRS.

Cut to today, when the IRS is asking small business owners to take a deeper look at their ERC claims and ensure there are no inaccuracies. They’ve set a March 22, 2024 deadline for small businesses to apply for the ERC Voluntary Disclosure Program, which was developed specifically for businesses that have inaccurately claimed and received an Employee Retention Credit; the program allows ineligible recipients to repay just 80 percent of the credit they received, and there won’t be any interest or penalties. If businesses aren’t sure whether their ERC claim is in question, the IRS has identified seven warning signs that we’ll go through today. Pay close attention to these “suspicious seven” parameters to see if you need to reassess your eligibility and potentially take advantage of the ERC Voluntary Disclosure Program.

Suspicious Seven

1. Claiming too many quarters: Some promotors of the ERC have been urging employers to claim the ERC for every quarter it was available. Qualifying for that many quarters isn’t likely, which points to potential incorrect claims. Eligibility criteria can be found here.
2. Unqualified government orders: Some employers have been falsely instructed they can claim the ERC “if any government order was in place in their area, even if their operations weren’t affected or if they chose to suspend their business operations voluntarily” per the IRS website. Qualifying government orders can be found here.
3. High employee counts and wrong calculations: It’s important that employers exercise caution when claiming the ERC for all wages paid to every employee. There are rules in place that employers need to meet in order for wages to be considered qualified.
4. Supply chain woes: It’s not common that a business will qualify for the ERC based on a supply chain disruption, and employers need to make sure their supplier’s government order meets the requirements.
5. Claiming for too much of a tax period: Businesses are only able to claim the ERC for wages paid during the suspension period—not the entire quarter.
6. Claims made without paying wages, or business didn’t exist: ERC claims are not eligible for times the business either didn’t exist, or didn’t pay wages to its employees.
7. “There’s nothing to lose”: If someone told you there was “nothing to lose” in applying for the credit, they’re wrong. “Businesses that incorrectly claim the ERC risk repayment requirements, penalties, interest, audit and potential expenses of hiring someone to help resolve the incorrect claim, amend previous returns or represent them in an audit,” according to the IRS.

To avoid potential penalties or audits by the IRS, it’s essential for small businesses to ensure accurate and compliant claims when applying for tax credits like the ERC. Consulting with tax professionals or experts familiar with ERC guidelines can help in navigating the process correctly. And over at the Financial Pantry, you can rest assured that we’ll always work to keep you updated on the latest regulations, trends, and tips for small businesses. ARF Financial also has your financial needs covered—we offer loan products designed to fit your unique business situation, and our consultants are here to help you navigate the complex landscape of small business lending. Stop by today and learn more about what ARF Financial can do for your company.

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