New IRS guidelines to thwart unsubstantiated ERC claims

On Sept. 14, 2023, the IRS announced that it was implementing new guidelines in reviewing Employee Retention Credit (ERC) claims. This came as a response to the slew of unlicensed credit promoters that failed to substantiate ERC claims – leaving business owners with potentially catastrophic legal consequences including forfeiture of the ERC funds, penalties, interest, legal fees, and even criminal liabilities. This article was written to provide business owners with an overview of potential red flags that may raise concerns while your claim is undergoing IRS review.

Red Flag # 1 - Claims filed by ERC promoters

The ERC holds the number one spot on the IRS’ “2023 Dirty Dozen List.” This list was published in April 2023 and was issued as a warning to taxpayers of the worst tax schemes. Shortly thereafter, IRS Commissioner Danny Werfel announced that the agency will increase audits of ERC claims and criminal investigations against promoters and businesses filing dubious claims. ERC claims submitted by these unlicensed promoters face heightened IRS scrutiny and may carry a higher audit risk than claims that are filed by a qualified tax professional.

If your claim was prepared by a company that you suspect may be a promoter, it is imperative that you seek help from a qualified tax practitioner as soon as possible to mitigate potential liabilities.

Red Flag #2 - Ineligible wage claims

Wages eligible for the ERC program are narrowly defined. Ineligible wages include, but are not limited to, wages used to claim other tax credits such as the R&D, wages paid to majority business owners and their relatives, and wages claimed as payroll costs when seeking Paycheck Protection Program (“PPP”) loan forgiveness.

The PPP and ERC programs have distinct and separate eligibility criteria, yet your qualifications in one will affect the other. Inconsistencies between PPP and ERC applications may indicate non-compliance with one or both programs’ guidelines.

Red Flag # 3 - Claims exceeding wage limitations

Taxpayers should be aware of how credits are calculated to ensure that they are not claiming a credit that exceeds wage limitations.

2020 credits are limited to 50% of eligible wages and each employees’ wages are capped at $10,000 for the full year. If an employee earned at least $10,000 in eligible wages in 2020, then the employer may qualify for a $5,000 refund for that employee. Employees who earned less than $10,000 will qualify for 50% of whatever wages were paid to them.

2021 credits are limited to 70% of eligible wages and each employee’s wages are capped at $10,000 per quarter, or up to $7,000 per employee per quarter for a potential credit totaling $21,000 for each employee for Quarters 1 – 3 of 2021.

2021 Quarter 4 credits are limited to employers that began operating after Feb. 15, 2020 and that qualify as a Recovery Startup Business.

Claims that exceed these wage limitations are a red flag and likely to catch the IRS’ attention. Taxpayers should also be cautious not to exceed wage limitations by claiming the credit against ineligible wages, such as PPP wages, or during a quarter in which the taxpayer is not eligible for the credit.

IRS’ moratorium on ERC claims filed Sept. 14, 2023

Due to the potential for abusive practices surrounding the ERC, the IRS implemented new review standards to scrutinize these claims. As part of the IRS’s push to crack down on unsubstantiated ERC claims, it halted the processing of any ERC claims filed after Sept. 14, 2023 and issued options for businesses that may have unknowingly submitted improper claims. These new options allow for reduced penalties and interest and settlement for proactive ERC recipients.

What if I already filed my claim?

This moratorium can be an opportune time for many businesses to review their ERC claims to determine if they raise any of the “red flags” discussed above and to rectify any errors before audits are issued.

The IRS disclosed that thousands of claims have already been referred for audit, 252 criminal investigations have been initiated involving billions of dollars in potentially fraudulent ERC refunds, and 15 federal charges with 6 convictions have resulted. With so much at stake, confirming your ERC eligibility with tax professionals specializing in this area is the first step to minimizing your potential exposure.