New IRS Warning Signs In ERC Update: Know All Details & Steps for Ensuring Accurate Claims

The IRS has recently highlighted significant updates regarding the Employee Retention Credit (ERC), a vital relief measure introduced during the COVID-19 pandemic. With an increasing number of claims being flagged for inaccuracies, the IRS is urging taxpayers to carefully review their ERC claims to avoid potential complications, including audits and penalties. This article delves into the recent IRS updates, the red flags to watch for, and the steps you can take to ensure your claims are accurate and legitimate.

New IRS Warning Signs

The IRS has recently identified new warning signs that indicate potential issues with ERC claims. These red flags are essential for both businesses and individuals with pending or processed claims. Among the new warning signs are:

1. Essential businesses during the pandemic that were able to operate fully without a decline in gross receipts.
2. Unsupported claims where a business cannot substantiate how a government order fully or partially suspended operations.
3. Family wages reported as qualified wages for the ERC.
4. Double-dipping: Businesses using wages already claimed for Paycheck Protection Program (PPP) loan forgiveness.
5. Large employers claiming wages for employees who continued to provide services.

These additions bring the total to 12 warning signs that the IRS uses to scrutinize ERC claims.

The ERC Landscape

The IRS resumed processing low-risk ERC claims after ending a temporary moratorium in July. However, the vast majority—85%—of ERC claims still under review are categorized as medium or high-risk, necessitating further scrutiny. This significant proportion highlights the importance of accuracy in claim submissions.

For businesses that may have inadvertently filed incorrect claims, the IRS is promoting the ERC Withdrawal Program. This program allows businesses to withdraw claims without penalties, thereby avoiding the complications of an audit.

The IRS has been clear that their focus is on correcting incorrect claims rather than punishing honest mistakes, though they are intensifying their scrutiny of so-called ERC promoters who may have misled taxpayers.

Correcting Common ERC Mistakes

The ERC has been a crucial financial support for many businesses, but the complexity of the program has led to a number of common mistakes. These errors can lead to serious consequences if not addressed promptly. Here are some of the most frequent issues:

Excessive Quarters Claimed: Some businesses have claimed more quarters than they were eligible for, often due to misunderstanding the eligibility criteria.

Ineligible Government Orders: Claims based on government orders that don’t meet ERC requirements can lead to disqualification.

Miscounting Employees: Errors in employee counts and wage calculations are common, resulting in incorrect claim amounts.

Over-Extended Claim Periods: Businesses sometimes claim ERCs for periods longer than what is allowed, particularly during periods when they weren’t operational.

Steps for Ensuring Accurate Claims

Given the heightened scrutiny, it’s crucial for businesses to take proactive steps to ensure their ERC claims are accurate. Here’s what you can do:

Review Your Claims: Double-check all paid and unprocessed claims for accuracy, focusing on the newly identified warning signs.

Consult a Tax Professional: If you’re unsure about any aspect of your claim, seek advice from a trusted tax advisor. Avoid relying on so-called ERC promoters, as their advice may lead to problematic claims.

Correcting Claims: If you realize your ERC claim may be incorrect, consider using the ERC Withdrawal Program to retract the claim without penalties. Alternatively, amend your return to reflect accurate information.

Stay Informed: The IRS is expected to announce further compliance efforts soon, so staying updated on the latest developments is essential for avoiding issues.

IRS’ Focus on Compliance

The IRS is ramping up its efforts to ensure compliance with the ERC program, with Commissioner Danny Werfel emphasizing the importance of correcting improper claims. The agency has already halted over $2 billion in false claims and continues to scrutinize pending claims closely. With the impending release of additional compliance measures, taxpayers are advised to act swiftly to correct any potential errors in their claims.

The Importance of Due Diligence

Navigating the complexities of the ERC requires diligence and accuracy. The IRS’s recent updates underscore the importance of ensuring that your claims meet all requirements. By reviewing your claims thoroughly, consulting with professionals, and correcting any issues promptly, you can avoid the pitfalls associated with incorrect ERC claims. Taking these steps will help safeguard your business from audits, penalties, and other complications, ensuring that you receive the support you’re entitled to without unnecessary risks.

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