IRS Identifies Seven “Warning Signs” for Invalid Employee Retention Credit (ERC) Claims

As the Internal Revenue Service (IRS) continues to crack down on Employee Retention Credit (ERC) fraud, it is advising businesses that improperly claimed the ERC to take advantage of the limited-time ERC Voluntary Disclosure Program (ERC VDP) or the claim withdrawal process before these options expire. Filing under the ERC VDP is an option for businesses that received refunds, while withdrawal is an option for businesses that still have invalid ERC claims pending. As Boston tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, business owners who fail to pursue either of these options will face significant risks in the event that the IRS uncovers their invalid ERC claims in the future.

Along with advising business owners to consider filing under the ERC VDP or filing for withdrawal, the IRS has also recently identified seven “warning signs” for invalid ERC claims. These “warning signs” are:

1. Too Many Quarters Being Claimed

The IRS advises that business owners “should carefully review their eligibility for each quarter.” While promoters often urged businesses to claim the ERC for all calendar quarters that the credit was available, the IRS states, "[q]ualifying for all quarters is uncommon.”

2. Government Orders That Don’t Qualify

To qualify for the ERC, a business must have fully or partially suspended its operations due to a government order related to the COVID-19 pandemic. Simply claiming a pandemic-related disruption is not enough to establish eligibility, and following “guidance, a recommendation or a statement” from the government does not qualify.

3. Too Many Employees and Wrong Calculations

The eligibility criteria for the ERC varied throughout 2020 and 2021. With this in mind, the IRS is advising business owners to, “carefully review all calculations and to avoid overclaiming the credit, which can happen if an employer erroneously uses the same credit amount across multiple tax periods for each employee.”

4. Business Citing Supply Chain Issues

According to the IRS, “[q]ualifying for [the] ERC based on a supply chain disruption is very uncommon.” As a result, any business owners who based their claims on supply chain disruptions during the pandemic should review their claims and consider filing under the ERC VDP or filing for withdrawal as warranted.

5. Business Claiming ERC for Too Much of a Tax Period

Even though the ERC was available on a quarter-by-quarter basis in 2020 and 2021, businesses were still required to assess their eligibility on a daily basis. As the IRS explains, if a business suspended its operations for part of any quarter, “[it] can claim [the] ERC only for wages paid during the suspension period, not the whole quarter.”

6. Business Didn’t Pay Wages or Didn’t Exist During Eligibility Period

If a business didn’t pay wages or didn’t exist during any period for which it claimed the ERC, this is highly likely to lead to scrutiny for ERC fraud if the business does not file under the ERC VDP or file for withdrawal.

7. Promotor Says There’s Nothing to Lose

Finally, the IRS advises: “Businesses should be on high alert with any ERC promoter who urged them to claim ERC because they ‘have nothing to lose.’” Relying on a promoter’s advice when filing an ERC claim is not an excuse for non-compliance—and businesses that improperly claimed the ERC based on a promoter’s advice must still remedy their violations.

Request a Confidential Consultation with Boston Tax Lawyer Kevin E. Thorn

If you need to know more about avoiding IRS scrutiny for ERC fraud, we invite you to contact us promptly. Please call 617-692-2989 or inquire online to request a confidential consultation with Boston tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group.