The IRS issued a new Information Release (IR 2024-198) on July 26, 2024, highlighting five additional signs of incorrect Employee Retention Credit (ERC) claims. This update supplements earlier warnings about ERC claim issues. For a comprehensive review of the previously identified problem areas, see our earlier publication: IRS: Warning Signs of Incorrect ERC Claims (02/15/2024).
Upcoming IRS Actions:
- Enhanced Guidance: The IRS will provide more detailed information on high-risk ERC claims to assist taxpayers in avoiding errors.
- Voluntary Disclosure Program: A short-term reopening of the Voluntary Disclosure Program is planned to offer additional options for correcting ERC claim issues.
- Low-Risk Payment Processing: The IRS will update on the processing of low-risk payments to support small businesses with valid ERC claims.
Background on ERC:
The Employee Retention Credit (ERC) was designed as a refundable tax credit to support eligible employers whose operations were either fully or partially suspended due to government orders related to the COVID-19 pandemic. Additionally, the credit applied to employers experiencing a significant decline in gross receipts during the shutdown period. The ERC was intended to offset employment taxes due on qualified wages paid to employees who could not work because of these shutdowns.
New Warning Signs of Incorrect ERC Claims:
Fully Operational Essential Businesses:
- Error: Claims by essential businesses that remained fully operational and did not experience a decline in gross receipts.
- Clarification: To qualify for the ERC, an essential business’s operations must have been fully or partially suspended by a qualifying government order. Simple health measures, such as mask mandates or handwashing protocols, do not meet the criteria for a suspension of operations.
Insufficient Evidence of Business Suspension:
- Error: Businesses failing to demonstrate how a government order substantially impacted their operations.
- Clarification: Employers must provide detailed evidence showing how government orders disrupted a significant portion of their business activities. Many claims have been rejected due to inadequate documentation proving this impact.
Wages Paid to Family Members:
- Error: Claims including wages paid to related individuals, such as family members.
- Clarification: The ERC does not cover wages paid to family members or related individuals. Only wages paid to non-related employees are eligible for the credit.
Overlap with PPP Loan Forgiveness:
- Error: Businesses claiming ERC for wages already reported for Paycheck Protection Program (PPP) loan forgiveness.
- Clarification: Wages used to obtain PPP loan forgiveness cannot be claimed again under the ERC. The Small Business Administration (SBA) provided these loans to retain employees during the pandemic, and wages used for PPP forgiveness are ineligible for the ERC.
Wages for Employees Providing Services:
- Error: Claims including wages for employees who continued to provide services.
- Clarification: The ERC is intended for wages paid to employees who were not performing work during the relevant periods. Claims involving wages for employees actively working are incorrect, especially among large employers who have made this mistake.
Options for Resolving Incorrect ERC Claims:
Claim Withdrawal:
- Action: For unprocessed ERC claims that are found to be incorrect, employers can utilize the ERC Withdrawal Program.
- Benefit: Withdrawing a claim treats it as though it was never filed, eliminating any associated interest or penalties.
Amendment of Returns:
- Action: Businesses that have overclaimed the ERC should amend their tax returns to correct the claim amount.
- Benefit: Amending returns ensures that the credit claimed accurately reflects the eligible amount, helping to avoid potential penalties and compliance issues.
For further assistance or detailed guidance on resolving ERC claim issues, please contact Martin D. Hauptman at (973) 243-7912 or via email at mhauptman@mblawfirm.com