Signs of an Incorrect Employee Retention Credit Claim

The IRS recently intensified its scrutiny of Employee Retention Credit (ERC) claims, revealing signs of potential misuse or inaccuracy. The ERC, a vital component of the government’s relief efforts during the COVID-19 pandemic, was introduced to support businesses in maintaining their workforce despite operational disruptions. Available from March 31, 2020, to September 30, 2021, the credit aimed to alleviate the financial strain on businesses that experienced full or partial shutdowns due to government mandates. However, as the IRS reviews these claims, several red flags indicate possible improper use of the credit.

One significant issue is the claim by essential businesses that were fully operational during the pandemic. Essential businesses, such as healthcare providers and grocery stores, were permitted to continue operating under government guidelines, making them ineligible for ERC benefits, which were intended for those whose operations were directly impacted by government orders.

Additionally, some businesses have been unable to provide adequate documentation demonstrating how a government order affected their operations. The ERC was designed to assist businesses facing operational interruptions, and proper documentation is crucial to validate claims. Without clear evidence, the legitimacy of these claims comes into question.

Another troubling sign involves businesses reporting wages paid to family members as qualified wages for the ERC. This practice is problematic as it may not align with the credit’s intent, which is to support wages for employees who are not related to the business owner.

Furthermore, some businesses have claimed ERC benefits for wages that were already utilized in Paycheck Protection Program (PPP) loan forgiveness calculations. The IRS has stipulated that wages used for PPP loan forgiveness cannot be simultaneously claimed for ERC, as this would result in duplicative benefits.

Lastly, large employers have been noted for claiming ERC on wages paid to employees who continued to provide services throughout the pandemic. This is contrary to the ERC’s purpose, which was to support businesses during periods of reduced or suspended operations.

As the IRS continues to review ERC claims, businesses should ensure they adhere strictly to the credit’s requirements and maintain accurate documentation. The agency’s focus on these indicators highlights the importance of compliance and the potential consequences of misusing the ERC.