Last month, the Internal Revenue Service (IRS) announced seven warning signs that Employee Retention Tax Credit (ERTC) claims may be in error and urged businesses with ERTC claims to revisit their eligibility status. They said businesses should resolve any issues prior to March 22, the deadline for the agency’s voluntary disclosure program.

The seven warning signs, most of which focus on advice received from entities promoting ERTC claims (often contrary to “trusted tax advisor” advice), are:

• Too many quarters being claimed—IRS says qualifying for all quarters for which the ERTC is available is “uncommon.”
• Government orders that do not qualify—the rules surrounding government orders in place as a qualification element are very specific, the IRS said. Contrary to many promoters’ claims, the agency said, a claimant’s operations must have been fully or partially suspended, due to the COVID-19 pandemic, by government order for the quarter for which they are claiming the credit.
• Too many employees and wrong calculations—the IRS notes that ERTC eligibility includes dollar limits on wages and varying credit amounts.
• Supply chain issues—“Qualifying for the ERTC based on a supply chain disruption is very uncommon,” the IRS pointed out.
• Claims based on too much of a tax period—the IRS notes that while “it is possible but uncommon” for an employer to qualify for the ERTC for an entire calendar quarter, the ERTC can be claimed only for wages paid during the suspension period, which is most often shorter than the entire quarter.
• Claims based on wages not paid—“Employers can claim ERTC for tax periods when they paid wages to employees—if wages were not actually paid or if there were no employees during the period, there will not be a valid ERTC claim,” the IRS said.
• “Nothing to Lose” statements—the IRS said a big warning sign is a promoter claiming that a potential claimant has “nothing to lose” by filing an ERTC claim. Rather, the IRS noted, businesses that incorrectly claim the ERTC “risk repayment requirements, penalties, interest, audit and potential expenses of hiring someone to help resolve the incorrect claim, amend previous returns, or represent them in an audit.”

Until March 22, taxpayers who determine they have filed an incorrect ERTC claim, even if they have received payment/credit for it, can participate in the IRS voluntary disclosure program. Through the program, eligible participants can repay, with a 20 percent discount, incorrect ERTC claim benefits.

Prospects: Currently, there is considerable focus on the ERTC and the validity of the claims for it. Audit activity is increasing, and sympathy for in-error claims is minimal. Any NAIFA member that made an ERTC claim should check to be sure they are in full compliance with the rules governing the tax credit to avoid the penalties and expense of dealing with the IRS if the agency challenges the claim.

 NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org.