IRS warns of incorrect claims for employee retention credit

MADISON, Wis. -- The Internal Revenue Service shared Friday five new warning signs being seen on incorrect claims by businesses for employee retention credit.

The IRS said it issued the warning signs to give businesses and tax professionals more time to prepare for an upcoming announcement involving new steps being taken to counter improper ERC claims, including a short-term reopening of the Voluntary Disclosure Program. Aggressive promoters lured many businesses to mistakenly claim the pandemic-era credit when they are not eligible.

The IRS said essential businesses operating during the pandemic that could fully operate and did not have a decline in gross receipts are ineligible to receive ERC, mainly because their operations were not fully or partially suspended by a qualifying government order. Hand-washing and mask-wearing do not qualify as suspended business operations.

Furthermore, the IRS said businesses unable to show proof or support how a government order fully or partially suspended business operations are ineligible to receive ERC.

If business owners claim ERC using wages paid to related individuals, they are likely ineligible to receive the credits. Family members' wages are not qualified wages for the ERC. Businesses using wages that were already used for Paycheck Protection Program loan forgiveness are also ineligible.

The IRS said large employers claiming wages for employees who provided services are generally ineligible to claim ERC, although special rules can be applied to large eligible employers.

Previously shared signs of an incorrect ERC claim, according to the IRS, include claiming too many quarters, citing government orders that don't qualify, claiming too many employees and using wrong calculations, citing supply chain issues, claiming ERC for too much of a tax period, and not paying wages or not existing during the eligibility period.

The IRS said it is scrutinizing more claims that show risk of being incorrect, as well as beginning additional processing of low-risk claims to those with eligible claim. To resolve an incorrect claim, the IRS recommends considering the ERC Withdrawal Program or amending a return.

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