The Internal Revenue Service (IRS) has issued a renewed warning to taxpayers about the potential risks of making false or inaccurate claims for the Employee Retention Credit (ERC). Optima Tax Relief reviews what the Employee Retention Credit is and how to avoid false claims for it.
What is the Employee Retention Credit (ERC)?
The ERC is a refundable tax credit that is designed to help businesses keep employees on their payroll during the COVID-19 pandemic. The ERC was first introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and has since been extended and expanded by subsequent legislation. The credit is available to eligible employers who experienced a significant decline in gross receipts or were forced to suspend operations due to government orders related to the pandemic. Employers can claim a credit of up to 70% of qualified wages up to $10,000 paid to eligible employees per quarter, with a maximum credit of $7,000 per employee per quarter.
To be eligible for the ERC, employers must have:
- sustained a full or partial suspension of operations due to orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
- experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
- qualified as a recovery startup business for the third or fourth quarters of 2021.
What Is Considered a False Claim for the ERC?
The IRS has become aware of instances where the credit has been claimed improperly, which can lead to significant compliance risks for both individuals and businesses. The IRS has already identified instances where businesses have claimed the credit improperly, such as claiming the credit for wages that were not actually paid or claiming the credit for employees who were not eligible.
What Are the Consequences of Falsely Claiming the ERC?
The consequences of making false or inaccurate claims for the ERC can be severe. The IRS has warned that individuals and businesses who claim the credit improperly may be subject to penalties, interest, and even criminal prosecution. In addition, the IRS has stated that it will be conducting audits and other enforcement actions to identify and address noncompliance.
How Can Taxpayers Avoid Falsely Claiming the ERC?
To avoid these risks, the IRS is urging taxpayers to be diligent in their claims for the ERC. Businesses should ensure that they meet the eligibility requirements and that they are accurately calculating the credit based on qualified wages paid. They should also keep detailed records to support their claims, such as documentation of gross receipts and payroll records.
Individuals and businesses who are unsure about their eligibility for the ERC or who have questions about the credit should consult with a tax professional or visit the IRS website for more information. By taking the necessary steps to ensure compliance, businesses can benefit from the ERC without exposing themselves to unnecessary risks