Tax Tip 2024-15: Seven warning signs of incorrect Employee Retention Credit claims

IRS Tax Tips

March 11, 2024

Issue Number: Tax Tip 2024-15

Seven warning signs of incorrect Employee Retention Credit claims

Some unscrupulous promoters have marketed misleading information about Employee Retention Credit eligibility rules to well-intentioned businesses. The IRS is highlighting seven suspicious signs and urging business to seek a trusted tax professional to resolve an incorrect claim while they still can without penalties or interest.

There?s a deadline of March 22, 2024, for the ERC Voluntary Disclosure Program, which lets businesses who filed a claim in error and received a payment repay just 80% of the claim. Taxpayers who filed an incorrect claim that hasn?t been processed, or who have an ERC check they haven?t cashed or deposited, should quickly pursue the claim withdrawal process.

Seven suspicious signs an ERC claim could be incorrect

Too many quarters being claimed. Some promoters urged employers to claim the ERC for all quarters that the credit was available. Qualifying for all quarters is uncommon. Employers should carefully review their eligibility for each quarter.
Government orders that don?t qualify. Some promoters told employers 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. This is false. Some promoters also suggested that an employer qualifies based on communications from the Occupational Safety and Health Administration. This is generally not true. Employers should review the frequently asked questions about ERC ? Qualifying Government Orders for more information and helpful examples for these topics.
Too many employees and wrong calculations. Employers should be cautious about claiming the ERC for all wages paid to every employee on their payroll. Employers need to meet certain rules for wages to be considered qualified wages, depending on the tax period. Employers should review all calculations to avoid overclaiming the credit. They should not use the same credit amount across multiple tax periods for each employee. For details on credit amounts, see the?ERC 2020 vs 2021 Comparison Chart.
Business citing supply chain issues. A supply chain disruption by itself doesn?t qualify an employer for ERC. An employer needs to ensure that their supplier?s government order meets the requirements. Employers should carefully review the rules on supply chain issues and examples in the 2023 legal memo on supply chain disruptions.
Business claiming ERC for too much of a tax period. It's possible, but uncommon, for an employer to qualify for ERC for the entire calendar quarter if their business operations were fully or partially suspended due to a government order during a portion of a calendar quarter. A business in this situation can claim ERC only for wages paid during the suspension period, not the whole quarter. Businesses should check their claim for overstated qualifying wages and should keep payroll records that support their claim.
Business didn?t pay wages or didn?t exist during eligibility period. Employers can only claim ERC for tax periods when they paid wages to employees. Records available to the IRS show some businesses that claimed ERC didn?t have any employees or they claimed ERC for tax periods before the business existed.
Promoter says there?s nothing to lose. Businesses should be on high alert with any ERC promoter who urged them to claim ERC because they ?have nothing to lose.? Businesses that incorrectly claim the ERC risk repayment, penalties, interest, audit and other expenses.

The IRS has an interactive ERC Eligibility Checklist that tax professionals and taxpayers can use to check potential eligibility for ERC. It?s also available as a printable guide.

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Issue Number: Tax Tip 2024-15