IRS Identifies More “Warning Signs” for ERC Fraud

As we discussed last month, the Internal Revenue Service (IRS) has determined that the “vast majority” of Employee Retention Credit (ERC) claims show signs of fraud. Now, the IRS has shed additional light on its findings, identifying 12 specific “warning signs” for fraudulent ERC claims. With the IRS continuing to prioritize ERC fraud enforcement, Massachusetts businesses that claimed the credit should work with an experienced Boston tax attorney to reassess their eligibility and determine whether remedial action is warranted.

12 “Warning Signs” for ERC Fraud

After publishing an initial list of seven “warning signs” for ERC fraud in May, the IRS recently followed up with a list of five additional “warning signs” on July 26, 2024. As a result, the IRS is now targeting all of the following as potential red flags for ERC fraud:

• Claiming the ERC despite not experiencing a decline in gross receipts during the COVID-19 pandemic;
• Being unable to demonstrate how a government order caused a full or partial suspension of the business’s operations;
• Reporting majority owners’ or family members’ wages as qualified wages when claiming the ERC;
• Using wages already used for Paycheck Protection Program (PPP) loan forgiveness when claiming the ERC;
• Improperly claiming the ERC as a “large employer” for employees who were not providing services during the COVID-19 pandemic;
• Claiming the ERC for too many quarters during the 2020 and/or 2021 tax years;
• Claiming the ERC based on government orders that do not qualify as causing a full or partial suspension of business operations;
• Claiming the ERC for too many employees or improperly calculating eligible employees’ qualified wages;
• Citing supply chain issues as the basis for claiming the ERC (as the IRS explains, “[a] supply chain disruption by itself doesn’t qualify an employer for ERC”);
• Claiming the ERC for an entire quarter when the business only experienced a qualifying disruption for a portion of the quarter;
• Claiming the ERC when the business didn’t exist or didn’t pay wages during the ERC eligibility period; and,
• Working with a promoter who falsely represented the business’s eligibility to claim the ERC or who encouraged improper calculation of the ERC.

These issues—among others—can lead to civil or criminal allegations of ERC fraud for Massachusetts businesses. While the IRS is actively conducting audits and investigations focused on ERC fraud, businesses that are not yet facing scrutiny have options available if they need to address improper claims. In all situations, prompt and informed decision-making is key, and this starts with engaging an experienced Boston tax attorney who can assist with determining the best path forward based on a business’s specific circumstances.

Request a Consultation with Boston Tax Attorney Kevin E. Thorn

If you need to know more about the IRS’ ongoing efforts to target fraudulent ERC claims in Massachusetts, we encourage you to contact us promptly. To request a consultation with Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 617-692-2989 or contact us confidentially online today.