On July 25, the Internal Revenue Service (IRS) announced five new warning signs that it will deny employee retention tax credit (ERTC) claims. The agency is urging businesses with pending ERTC claims to review those claims in light of the 12 warning signs (five new ones added to the seven already announced) in order to avoid penalties, interest charges and/or audits.

The IRS is prioritizing enforcement of ERTC claims, citing massive fraud in the program. The five new warning signs include:

• Essential businesses during the pandemic that could and did operate fully and had no decline in gross receipts
• Businesses that cannot show how a qualifying government order fully or partially caused them to suspend business operations
• Businesses reporting family members’ wages as qualified wages
• Businesses using wages already used for Paycheck Protection Program loan forgiveness
• Large employers that claimed wages for employees who provided services

 The previously announced seven other warning signs include too many quarters being claimed, use of government orders to shut down that do not qualify under the law, claims for too many employees, incorrect calculations, businesses citing supply chain issues, businesses claiming the ERTC for too much of a tax period, and businesses that did not exist or did not pay wages during the eligibility period.

Prospects: The IRS said it is reopening its Voluntary Withdrawal Program, allowing businesses that have claimed the ERTC but now think they will not qualify for it to withdraw their claims (or repay them if they have already been paid). Such taxpayers can avoid interest and penalties by withdrawing their claims, amending their tax returns, or making use of the agency’s Voluntary Disclosure Program, the IRS said.

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