Roth&Co hosted a webinar on February 28, 2024, featuring Tax Controversy Manager Ahron Golding, Esq. The webinar discussed the recent approach that the IRS has been taking towards the Employee Retention Credit (ERC), scrutinizing ERC claims for abuse and fraud. Audits and criminal investigations on promoters and businesses filing questionable claims are intensifying, with thousands of audits already in the pipeline.
What is the IRS looking for? Here is what the IRS refers to as the ‘suspicious seven:’
- Too many quarters being claimed
Some promoters have urged employers to claim the ERC for all 7 quarters that the credit was available. Since the IRS believes that it is rare for a business to legitimately qualify for all quarters, making a claim for all of them is a red flag.
- Government orders that don’t qualify
In order for a business to qualify for the ERC due to a government order that compromised their operations:
- the order must have been in effect for the periods claimed
- the order must have been directed towards the business rather than towards the customer
- the full or partial shutdown must have been by order and not simply via guidance or recommendation
- the IRS is looking for the negative financial impact on the business
Claiming that an entire segment of a business was shut down, though that segment was not significant compared to the entire business, will cause a claim to be disallowed.
- Too many employees and wrong ERC calculations
The laws are complex, and have changed throughout 2020 and 2021. Dollar limits, credit amounts, and the definition of qualified wages changed as well. Make sure your calculations are accurate.
- Supply chain issues
The IRS is not looking kindly at claims based on general supply chain disruption.
- Business claiming the ERC for too much of a tax period
If eligibility is based on full or partial suspension, then a business can only claim the ERC for wages paid during the period of actual suspension, not necessarily the whole quarter.
- Business did not pay wages or did not exist during the eligibility period
If the business did not exist or pay any wages during the period of the claim, the claim will be disallowed by the IRS and prosecuted for fraud.
- Promoter says there’s nothing to lose
Promoters that urged businesses to claim the ERC because they had “nothing to lose” were mistaken. Incorrectly claiming the ERC invites repayment requirements, penalties, interest, audits, and the expense of hiring someone to help resolve the error, amend returns, and represent the business in an audit.
The IRS has a comprehensive ERC eligibility checklist here.
Many businesses have neglected to take into account the issue of aggregation as it applies to the ERC credit. This can potentially effect employee count, revenue, and other crucial calculations.
Overall, the IRS is not too pleased with ERC promoters. IRS auditors have been trained to start an audit by asking who the taxpayer used to help prepare their claim. The IRS expects a taxpayer to utilize a trusted tax professional, rather than a dubious ‘ERC mill’.
What if the employer has an opinion letter to back up his claim? Generally, opinion letters are only as valuable as the backup data they provide. If a claim can be justified by hard numbers, it will help the employer if challenged.
If a business determines that it incorrectly claimed the Employee Retention Credit, it can use the ERC claim withdrawal process outlined here, so long as the business has not yet received the credit or hasn’t deposited an ERC check. Requesting a withdrawal means a business is asking the IRS not to process their entire adjusted return that included the ERC claim. If the IRS accepts the request, the claim will be treated as if it was never filed.
If a business incorrectly received the ERC before December 21, 2023, and deposited the check, they can apply for the ERC Voluntary Disclosure Program before March 22nd, 2024. This program allows participants to repay only 80% of the ERC they received as a credit on their return or as a refund. Click here for more details.
If your business received an opinion letter regarding ERC eligibility that you would like us to review, please email engage@rothcocpa.com.
This summary has been presented for educational purposes only and does not constitute a comprehensive study of the ERC tax laws or serve as a legal opinion or tax advice.
