Employee Retention Credit (ERC): Did your business claim the Employee Retention Credit (ERC) during the pandemic? The IRS is urging businesses to review their claims to avoid future issues. This Post highlights 7 Warning Signs of a Potentially Incorrect ERC Claims (IRS) is looking for and explains how to resolve incorrect ERC claims before the deadline (March 22nd, 2024).
Let’s make sure your ERC claim is on the right track!
What is the Employee Retention Credit (ERC)?
The Employee Retention Credit (ERC), also sometimes called the Employee Retention Tax Credit (ERTC), was a refundable tax credit program created by the U.S. government to help businesses keep employees on payroll during the COVID-19 pandemic. It wasn’t meant for individuals, but for businesses and tax-exempt organizations.
The program is no longer active, ending at the close of November 2021, but businesses that qualify can still file for the credit they earned.
- Purpose: Help businesses retain employees during the economic downturn caused by COVID-19.
- Benefit: Refundable tax credit against payroll taxes.
- Availability: The program was available for wages paid from March 12, 2020, through December 31, 2021.
- Eligibility: Businesses had to meet specific criteria related to their business operations being impacted by COVID-19 or experiencing a decline in gross receipts.
7 Warning Signs of a Potentially Incorrect ERC Claims
Is your ERC claim accurate? The Employee Retention Credit (ERC) program offered tax relief to businesses during the pandemic. However, some claims might be incorrect, leading to issues with the IRS. Here are 7 red flags to watch out for:
1. Claiming the Credit for Too Many Quarters
- Qualifying for the ERC for every quarter it was available is uncommon.
- Carefully review your eligibility for each specific quarter.
2. Government Orders Not Meeting Requirements
- Don’t be misled by promoters who say any government order qualifies you for ERC.
- Your business operations must be significantly impacted, and the order can’t be due to voluntary suspension.
- OSHA communications generally don’t qualify as qualifying government orders.
- Refer to the IRS’s “https://www.irs.gov/coronavirus/frequently-asked-questions-about-the-employee-retention-credit” for more information and examples.
3. Inaccurate Employee and Wage Calculations
- Don’t claim the ERC for all wages paid to every employee.
- Specific rules define “qualified wages” for each tax period.
- Review all calculations to avoid claiming too much credit.
- Credit amounts shouldn’t be identical across multiple tax periods for each employee.
- Use the “https://www.irs.gov/newsroom/employee-retention-credit-2020-vs-2021-comparison-chart” for details on credit amounts.
4. Supply Chain Issues Alone Don’t Qualify
- A disrupted supply chain doesn’t automatically qualify your business for ERC.
- The government order impacting your supplier must meet specific requirements.
- Thoroughly review the IRS’s “https://www.gtlaw.com/en/insights/2023/7/irs-says-general-supply-chain-disruptions-do-not-justify-employee-retention-credit” and the “https://kpmg.com/us/en/home/insights/2023/07/tnf-irs-clarifies-position-erc-supply-chain-disruptions-glam.html” legal memo for details.
5. Claiming ERC for an Entire Quarter with Limited Impact
- It’s uncommon, but possible, to qualify for ERC for a full quarter if your operations were entirely or partially suspended due to a qualifying government order for a portion of that quarter.
- Claim ERC only for wages paid during the suspension period, not the whole quarter.
- Verify your claim for overstated qualifying wages and maintain payroll records supporting your claim.
6. No Wages Paid or Business Not Operational During Eligibility
- The ERC is only available for tax periods where you paid wages to employees.
- The IRS has identified instances of businesses claiming the credit without employees or before they even existed.
7. Promoters Saying “There’s Nothing to Lose”
- Be wary of promoters who claim there’s no risk in filing an ERC claim.
- Incorrect claims can lead to repayment, penalties, interest, audits, and additional expenses.
By being aware of these warning signs, you can ensure your ERC claim is accurate and avoid potential issues with the IRS.
How to Resolving Incorrect ERC Claims: Act Now to Avoid Penalties
Did you unintentionally claim the Employee Retention Credit (ERC) incorrectly? The IRS offers options to address the issue and potentially minimize penalties.
Although the March 22nd, 2024 deadline for the IRS’s Voluntary Disclosure Program (VDP) has passed, businesses still have two options offered by the IRS to resolve incorrect ERC claims.
01. Voluntary Disclosure Program (VDP)
If a business discovers they claimed the Employee Retention Credit (ERC) incorrectly and participates in the IRS’s Voluntary Disclosure Program (VDP) by the deadline of March 22nd, 2024, they can repay the incorrect amount minus a 20% penalty. This can be a significant benefit compared to facing potentially steeper penalties and interest charges from an IRS audit.
Here’s a breakdown of Voluntary Disclosure Program (VDP) program;
- Incorrect ERC amount: This refers to the amount the business claimed that they weren’t actually eligible for.
- 20% penalty: This is a reduced penalty offered through the VDP for coming forward and correcting the mistake.
- Repayment amount: The business would repay the incorrect ERC amount, minus the 20% penalty.
For example, if a business mistakenly claimed $10,000 in ERC:
- Incorrect ERC amount: $10,000
- 20% penalty: $10,000 x 20% = $2,000
- Repayment amount: $10,000 – $2,000 = $8,000
02. Claim Withdrawal
If you haven’t received payment yet, you may be able to withdraw your ERC claim entirely. This eliminates potential penalties and interest associated with an incorrect claim.
How to Withdraw Your ERC Claim
Claim withdrawal is only possible before the IRS issues payment. Once they send the money, your opportunity to withdraw vanishes. Don’t delay – take action immediately if you have concerns.
The IRS offers two option for withdrawal of ERC Claim.
- Online Withdrawal
- Mail a Withdrawal Request
01. Online Withdrawal
This method is generally the quickest and most convenient way to withdraw your ERC claim. Here’s a detailed breakdown of the steps involved:
- Visit the IRS online portal: https://www.irs.gov/payments/your-online-account.
- Log in to your account using your Electronic Filing Identification Number (EFIN) and PIN. If you haven’t registered for an online account yet, you can do so by following the on-screen instructions.
- Once logged in, navigate to the section for managing tax forms and payments. The specific navigation menu might vary depending on the IRS portal updates, but you’ll typically find it under sections labeled “Tax Forms,” “Manage My Account,” or “E-file and Pay.”
- Locate the specific section dedicated to the ERC program. This section might be titled “Employee Retention Credit” or “ERC Credits.”
- Search for the “Claim Withdrawal” option within the ERC section. The IRS portal terminology might use slightly different wording, such as “Rescind Claim” or “Withdraw Claim.” Look for functionalities related to reversing or withdrawing a submitted ERC claim.
- Follow the on-screen instructions carefully, ensuring all required information is provided for your specific claim. This might include details like your Employer Identification Number (EIN), tax period for the ERC claim you want to withdraw, and a brief explanation for the withdrawal.
- Once you’ve entered all the necessary details and reviewed them for accuracy, submit the withdrawal request electronically. The IRS portal will typically provide a confirmation message or tracking number for your reference.
02. Mail a Withdrawal Request
If you’re unable to access the IRS online portal or prefer a paper-based method, you can withdraw your ERC claim by mail. Here’s a step-by-step guide:
- Visit the IRS website (https://www.irs.gov/coronavirus/employee-retention-credit) and locate the specific form designated for ERC claim withdrawal. The IRS website provides downloadable forms and keeps them updated, so ensure you’re using the latest version.
- Download and print the form. Carefully review the instructions included with the form to ensure you’re filling out all the necessary sections accurately.
- Complete the form with all the relevant details about your claim, including your business’s Employer Identification Number (EIN), the tax period associated with the ERC claim you want to withdraw, and a clear explanation for why you’re withdrawing the claim. Be as precise as possible in your explanation, mentioning any errors you identified or reasons for requesting the withdrawal.
- Once you’ve completed the form, double-check all the information for accuracy and completeness. Any errors or missing details could delay the processing of your withdrawal request.
- Mail the completed form to the designated IRS address for ERC claim withdrawals. You can find the current mailing address on the IRS website or within the instructions accompanying the downloadable form.
- Keep a copy of the completed form and any mailing receipts for your records. This will be helpful for tracking the status of your withdrawal request and can serve as documentation in case of any future communication with the IRS.
Have questions about your ERC claim? Contact a tax professional today!
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