Tax Tips: Check business tax returns for signs of incorrect Employee Retention Credit claims
Some unscrupulous promoters have misrepresented eligibility rules for the Employee Retention Credit, luring well-intentioned businesses to claim the credit when they don’t qualify. The IRS is highlighting seven suspicious signs and urging businesses to seek a trusted tax professional to resolve an incorrect claim if they need to.
With ERC compliance work expanding, the IRS reminds businesses to quickly pursue the claim withdrawal process if they need to ask the IRS not to process an ERC claim for any tax period that hasn’t been paid yet.
Signs an ERC claim could be incorrect
These seven suspicious signs could indicate an incorrect claim:
• Too many quarters claimed. Some promoters urged employers to claim the ERC for all quarters that the credit was available. Qualifying for all quarters is uncommon. Employers should carefully review their eligibility for each quarter.
• Government orders that don’t qualify. Some promoters told employers they can claim the ERC if any government order was in place in their area, even if their operations weren’t affected or if they chose to suspend their business operations voluntarily. This is false. Some promoters also suggested that an employer qualifies based on communications from the Occupational Safety and Health Administration. This is generally not true. Employers should review the frequently asked questions about ERC – Qualifying Government Orders for more information and helpful examples for these topics.
• Too many employees and wrong calculations. Employers should be cautious about claiming the ERC for all wages paid to every employee on their payroll. Employers need to meet certain rules for wages to be considered qualified wages, depending on the tax period. Employers should review all calculations to avoid overclaiming the credit. They should not use the same credit amount across multiple tax periods for each employee. For details on credit amounts, see the ERC 2020 vs 2021 Comparison Chart.
• Supply chain issues. A supply chain disruption by itself doesn’t qualify an employer for ERC. An employer needs to ensure that their supplier’s government order meets the requirements. Employers should carefully review the rules on supply chain issues and examples in the 2023 legal memo on supply chain disruptions.
• Claims for too much of a tax period. It's possible, but uncommon, for an employer to qualify for ERC for the entire calendar quarter if their business operations were fully or partially suspended due to a government order during a portion of a calendar quarter. A business in this situation can claim ERC only for wages paid during the suspension period, not the whole quarter. Businesses should check their claim for overstated qualifying wages and keep payroll records that support their claim.
• Didn’t pay wages or didn’t exist during eligibility period. Employers can only claim ERC for tax periods when they paid wages to employees. Records available to the IRS show some businesses that claimed ERC didn’t have any employees or they claimed ERC for tax periods before the business existed.
• Promoter says there’s nothing to lose. Businesses should be on high alert with any ERC promoter who urged them to claim ERC because they “have nothing to lose.” Businesses that incorrectly claim the ERC risk repayment, penalties, interest, audit and other expenses.
The IRS has an interactive ERC Eligibility Checklist that tax professionals and taxpayers can use to check potential eligibility for ERC. It’s also available as a printable guide.
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Tax Tips: IRS warns taxpayers they may be scam victims if they filed for big refunds; misleading advice leads to false claims for Fuel Tax Credit, Sick and Family Leave Credit, Household Employment taxes
Taxpayers who filed these claims mistakenly need to follow advice on letters; consider filing amended return or talking to a trusted tax professional
WASHINGTON – The Internal Revenue Service issued a consumer alert today following ongoing concerns about a series of tax scams and inaccurate social media advice that led thousands of taxpayers to file inflated refund claims during the past tax season.
The IRS warned taxpayers not to fall for these scams centered around the Fuel Tax Credit, the Sick and Family Leave Credit and Household Employment taxes. The IRS has seen thousands of dubious claims come in where it appears taxpayers are claiming credits for which they are not eligible, leading to refunds being delayed and the need for taxpayers to show they have legitimate documentation to support these claims.
The IRS continues to urge taxpayers to avoid these scams as myths continue to persist that these are ways to obtain a huge refund. Many of these scams were highlighted during this spring’s annual Dirty Dozen series, including the Fuel Tax Credit scam, bad social media advice and “ghost preparers.”
For taxpayers who did fall for these traps, they need to follow steps to verify their eligibility for the claim. Some taxpayers could also face steep financial penalties, potential follow-up audits or criminal action for improper claims. The IRS encourages people to review the guidelines, talk to a trusted tax preparer and, in some cases, file an amended return to remove claims for which they’re ineligible to avoid potential penalties.
“Scam artists and social media posts have perpetuated a number of false and misleading claims that have tricked well-meaning taxpayers into believing they’re entitled to big, windfall tax refunds,” said IRS Commissioner Danny Werfel. “These bad claims have been caught during our fraud review process. Taxpayers who filed these claims should realize they’ve been tricked, and they face an extensive review process and a long potential wait if they’re owed a refund for other things.”
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