IRS Advises Employers to Resolve Employee Retention Credit (ERC) Issues Before March 22, 2024

The Internal Revenue Service (IRS) recently issued a News Release in which it advises employers to resolve any issues with their Employee Retention Credit (ERC) filings by March 22, 2024. This is the deadline to file under the IRS’ limited-time ERC Voluntary Disclosure Program (VDP). But, filing under the ERC VDP isn’t the only option for employers that have concerns—and it isn’t an option at all in some cases. As a result, informed decision-making is critical, as Texas tax attorney Lawrence Brown explains:

Options for Resolving Invalid ERC Claims with the IRS

Broadly, employers that improperly claimed the Employee Retention Credit have three options available. However, these options are available in different circumstances, and employers must be careful to ensure that they do not inadvertently submit a filing that increases their exposure. Depending on the circumstances at hand, it may be possible to resolve an improper ERC claim by one of the following means:

• Submitting a Voluntary Disclosure Under the ERC VDP – Employers can submit voluntary disclosures under the ERC VDP through March 22, 2024. However, to ensure that they file on time (and do not encounter technical or other issues), employers that need to submit voluntary disclosures should not wait until the deadline to file. Additionally, as we have discussed previously, while employers that file under the ERC VDP are only required to repay 80 percent of their improperly claimed credits, filing under the ERC VDP can be risky in some cases.
• Filing for ERC Withdrawal – Employers that are not eligible to file under the ERC VDP may still be able to file for withdrawal. This is an option for employers that have not yet received their credits from the IRS (subject to additional eligibility requirements). As we have also discussed, filing for withdrawal presents risks as well—so, here too, it is imperative that business owners and executives make informed and strategic decisions.
• Filing an Amended Federal Tax Return – For employers that are not eligible for either of these programs, filing an amended return may be the most prudent path forward. But, this option can also present risks. Employers must be careful to avoid filings that the IRS classifies as “quiet disclosures;” and, in some cases, they may need to consider filing under IRS Criminal Investigation’s (IRS CI) Voluntary Disclosure Practice instead.

From the company’s ability to pay to the risk of facing criminal prosecution, there are several factors that business owners and executives must consider when deciding how to resolve ERC-related issues. In all cases, however, prompt action is critical. The IRS and IRS CI are both actively targeting ERC fraud in 2024 and failing to proactively resolve any ERC-related issues can increase the risks of facing an audit or investigation.

7 “Red Flags” for Invalid ERC Claims According to the IRS

In its News Release urging employers to resolve ERC-related issues by March 22, 2024, the IRS also lists seven “red flags” for invalid ERC claims. The IRS states that these red flags have been the focus of many of its (and IRS CI’s) enforcement efforts to date:

1. “Too Many Quarters Being Claimed”

Under the terms of the ERC, employers were required to separately calculate their eligibility for the credit for each quarter during 2020 and 2021. According to the IRS, “[q]ualifying for all quarters is uncommon, and this could be a sign of an incorrect claim.”

2. “Government Orders That Don’t Qualify”

The IRS also warns that claiming the ERC based on non-qualifying government orders could expose employers to liability for fraud. To qualify, “[g]overnment orders  must have been in effect and the employer’s operations must have been fully or partially suspended by the government order during the period for which they’re claiming the credit.”

3. “Too Many Employees and Wrong Calculations”

Claiming the ERC for non-qualifying employees or for non-qualified wages can lead to an incorrect calculation. “[I]f an employer erroneously uses the same credit amount across multiple tax periods for each employee,” this has the potential to result in an invalid claim and lead to scrutiny from the IRS or IRS CI.

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 the IRS goes on to explain, “[a] supply chain disruption by itself doesn’t qualify an employer for [the] ERC.” Instead, all ERC claims must be based on an applicable government order.

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

Employers can also face scrutiny for claiming the ERC for an entire quarter when their operations were only disrupted for a portion of the quarter. As the IRS makes clear, a business “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”

Claims filed on behalf of companies without payroll or that didn’t exist during the eligibility period have already led to criminal investigations in some cases. While the IRS is now working to disallow these claims, it is also focused on holding fraudulent filers accountable for claims previously paid.

7. “Promoter Says There’s Nothing to Lose”

Finally, the IRS warns that “[b]usinesses should be on high alert with any ERC promoter who urged them to claim ERC because they ‘have nothing to lose.’” While business owners and executives who relied on promoters’ representations in good faith may not be at risk for criminal prosecution as a result of their invalid ERC filings, they must still correct their filings in order to avoid IRS (or IRS CI) scrutiny in the future.

Request a Confidential Consultation with a Texas Tax Attorney at Brown Tax, P.C.

The attorneys at Brown Tax, P.C. represent companies and individuals in high-stakes federal tax matters. If you have concerns about your company’s ERC claim (or claims) and would like to speak with a Texas tax attorney, you can call 888-870-0025 or contact us online to request a confidential consultation.