IRS Alerts Taxpayers on Employee Retention Credit Errors

The Internal Revenue Service (IRS) has recently issued a warning to taxpayers regarding a surge in incorrect claims related to the Employee Retention Credit (ERC). The ERC is a vital resource designed to support businesses that continued to pay their employees during the COVID-19 pandemic. However, errors in claiming this credit have become prevalent, leading the IRS to advise caution and accuracy among claimants. Understanding these errors and how to avoid them is crucial for businesses looking to leverage this benefit without landing in hot water.

Common Errors When Claiming the Employee Retention Credit

Companies aiming to capitalize on the ERC should be wary of the following common errors:

• Misunderstanding Eligibility Criteria: Many businesses mistakenly believe they qualify for the ERC without thoroughly understanding the eligibility criteria. Only certain employers who faced significant disruptions due to government orders and experienced a significant decline in gross receipts are eligible. It's essential to thoroughly review the IRS guidelines to ensure your business meets all the conditions.
• Improper Claim Calculations: Errors often occur in the calculation of qualified wages, which can be more complex than expected. Businesses might fail to include or exclude certain wages, bonuses, or healthcare expenses, leading to incorrect claim amounts. Accurate bookkeeping and payroll records are vital to making correct calculations.
• Double Dipping with Other Relief Programs: The Paycheck Protection Program (PPP) and other relief measures have their own sets of rules that can overlap with the ERC. Claimants sometimes inadvertently claim the same wages for both the ERC and the PPP loan forgiveness, which is prohibited. Clear separation of expenses for each program is necessary to avoid errors.
• Ignoring IRS Updates and Guidance: IRS regulations and guidelines can evolve. Failing to stay updated on the latest IRS notices, FAQs, and other guidance can lead to outdated or incorrect claims. Regularly checking the IRS website or consulting with a tax professional can help keep your claims compliant.
• Lack of Proper Documentation: Proper documentation is key to supporting any ERC claim. Businesses often miss out on maintaining records like copies of government orders that led to partial or full suspension, detailed payroll records, and other backup documentation. Without adequate proof, your ERC claim may be disallowed during an audit.

Strategic Tips for Correct ERC Application

To help you navigate the complexities of the ERC and submit a proper claim, consider these strategic tips:

• Consult with Tax Professionals: Engaging a qualified tax advisor or accountant who has experience with the ERC can provide invaluable guidance. They can help interpret the regulations correctly and ensure all calculations and documentation meet IRS standards.
• Utilize IRS Resources: The IRS offers various resources, such as FAQs, notices, and webinars on the ERC. Utilize these to educate yourself and your team on the correct procedures for calculating and claiming the credit.
• Conduct Internal Audits: Before submitting your claim, conduct an internal audit to review all documentation and calculations. This can help catch potential errors and rectify them before they become an issue.
• Keep Detailed Records: Maintain robust documentation of how your business meets ERC eligibility criteria, detailed payroll records, and any communications or documents related to government orders affecting your operations. Adequate record-keeping is essential for compliance and audit readiness.
• Regularly Review and Update Your Information: Businesses should periodically review their claim process and update their information as needed. Changes in your business status or new IRS guidelines may affect your eligibility or the amount you can claim.

Understanding the Implications of Incorrect Claims

Submitting an incorrect ERC claim can have serious implications:

• Audits and Penalties: Incorrect claims can trigger an IRS audit. If the IRS determines that your claim was inaccurate or fraudulent, your business could face significant penalties and be required to repay the erroneous credits with interest.
• Financial and Legal Repercussions: Beyond penalties, incorrect claims can have broader financial repercussions, including increased tax liabilities and legal costs. Ensuring accuracy protects your business from these potential financial strains.
• Potential Reputation Damage: An IRS audit or penalty made public can harm your business's reputation, affecting relationships with customers, suppliers, and stakeholders. Maintaining compliance can safeguard your companys credibility.

Conclusion

The Employee Retention Credit offers a significant benefit for eligible businesses, but incorrect claims can negate these benefits and expose businesses to audits, penalties, and other complications. By understanding common errors, keeping detailed records, and consulting with tax professionals, businesses can ensure their claims are accurate and compliant.

Ready to save on taxes and ensure your credits are claimed correctly? Set up a call with our team for expert guidance on navigating the complexities of the ERC and other tax credits.