The Internal Revenue Service (IRS) is warning employers to be wary of third parties who are advising them to claim the Employee Retention Credit (ERC) when they may not qualify. These third parties may be contacting businesses through phone or email, and charge large upfront fees or a fee that is contingent on the amount of the refund; and may not inform taxpayers that wage deductions claimed on the business federal income tax return must be reduced by the amount of the credit.
If the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction. The adjustment in deduction will then change the net income of the business, with a potential trigger effect to then change shareholder income.
The IRS is encouraging business owners to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.
What is the ERC?
The ERC is a refundable tax credit designed for businesses that continued paying employees while shutdown due to COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to December 31, 2021.
To be eligible for the ERC, employers must have:
- Sustained a full or partial suspension of operations due to orders from an appropriate 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.
As a reminder, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021. Additionally, for any quarter, eligible employers cannot claim the ERC on wages that were reported as payroll costs in obtaining PPP loan forgiveness or that were used to claim certain other tax credits.
If you do file a claim for the ERC credit, it is imperative that you keep records because while the IRS has not published any specifics on their process for determining which claims to audit, but it is expected that they will go after bigger claims first.
If you believe that your company may qualify for the ERC credit, we recommend that our clients contact us and we would be more than willing to help confirm and provide service for getting your claims filed and if needed, tax returns amended.