The IRS recently issued a statement regarding incorrect Employee Retention Credit (ERTC) Claims they have been noticing. Many business owners have utilized ERTC services that are not tax professionals or associated with the IRS. This has caused a wide issue of misinformation that could have serious negative implications on business owners who filed ERTC claims with incorrect information.
Since the announcement of the ERTC program in March of 2020, many ERTC servicers with no professional tax experience began appearing with aggressive marketing tactics. These messages included an oversimplification and misinformation of program eligibility. They would often say business owners “had nothing to lose” by applying knowing their terms of service was receiving a percentage of the payout.
Because of this, many business owners applied for the program with inaccurate information, due to being ill-advised. If your business is ineligible for the ERTC, but received a check due to a misrepresented claim, the consequences include: paying back the credit in full, accrued penalties and interest, an IRS audit and the additional expense of hiring a professional to correct this issue.
You can only claim the ERTC for wages paid during a governmental order suspension period. Meaning, your non-essential business could not operate during a specific time period and you paid wages to your employees during this time. Many business owners were urged to claim the ERTC for all quarters during the credit availability time frame. It is rare that a business qualifies for all quarters.
Only businesses that could not operate as a result of a government order that was specific to the COVD-19 pandemic are eligible to claim the ERTC. Additionally, it has to be an order, guidances, statements and recommendations do not qualify a business.
From 2020 to 2021, the law changed in regards to dollar limits and wage credits. Additionally, there are certain rules for qualification of qualified wages. Qualified Wages are those subject to Social Security and Medicare taxes, including possible Health Care expenses paid to employees.
Per the IRS website, the amount of qualified wages eligible to claim depend on these factors:
The average number of employees you employed in 2019;
Whether the employees provided services for the wages you paid during the suspension of operations or the quarter in which there was the requisite decline in gross receipts;
How the related individual rules apply to your situation;
Whether the wages were used to claim other tax credits; and
Whether the wages were used as payroll costs for other programs (Paycheck Protection Program, shuttered venue operators grant or restaurant revitalization grant).
Only businesses who absolutely could not operate without the product from their supplier are eligible to claim supply chain issues on their ERTC. Additionally, the supplier had to have been shut down due to a government order related to the COVID-19 pandemic and the business could not obtain the product elsewhere (regardless of cost).
If you submitted an ERTC but your business (1) did not have employees during the claimed periods or (2) had not had an IRS assigned EIN during the tax period claimed (per the IRS your business did not exist), your business is not in fact eligible.
The IRS has created the Voluntary Disclosure Program for businesses that incorrectly filed an ERTC claim to resolve it without penalties, interest or possible audits. The deadline to participate in this program is March 22, 2024.
If you received a payment by check or deposit after December 21, 2023 and your business is not eligible, you are not eligible for the Voluntary Disclosure Program. You must not cash the check or use the deposited funds. You will have the opportunity to withdraw your claim and return the money without penalties or interest.
If you are not sure whether or not your ERTC claim was incorrect or your business’ eligibility, you can reach out to us for assistance. Additionally, the IRS has created an ERTC Eligibility Checklist directly on their site. Click here to review.