IRS red-flags COVID employee retention credit claims

Believe it or not, there’s still money left on the table for companies that kept workers on their payrolls while struggling to stay afloat during the COVID-19 pandemic.

Heads up: Businesses face a March 24 deadline to correct any employee retention credit (ERC) payment claims previously made to the Internal Revenue Service.

Initially the IRS said a business could qualify for ERC if it experienced a 50% loss in gross receipts in a quarter compared to the same quarter the previous year, dating back to the third quarter of 2021. IRS then modified the qualification to a 20% loss in gross receipts, which made even more employers eligible for a tax credit.

Also keep in mind: Group health plan expenses may qualify as wages. Furloughed employees who weren’t getting a paycheck during COVID can count toward ERC if their health insurance was still being paid for.

We warned readers about scam artists tricking ineligible businesses and individuals to file for ERC relief. The IRS is on to these scams and is now warning ERC claimants of red flags that are likely to lead to a claim denial. In essence the tax cops are warning the public: Unless your claim is 100% on the up-and-up, don’t try it.

IRS warns: Don’t make claims that contain these errors

The tax cops put out guidance that spells out 7 “warning” or “suspicious” signs an ERC claim may be incorrect. Some of the warnings are no-brainers that any reputable finance pro shouldn’t need a heads up on.

Here are the “honest mistakes” to be aware of before filing:

• Citing a supply chain disruption. The IRS warns that “a supply chain disruption by itself doesn’t qualify an employer for ERC.” However, the IRS will consider a narrow supply chain argument if an employer wasn’t partially or fully suspended due to COVID restrictions, but its supplier was and it prevented the business from operating.
• Claiming too much for a tax period. It’s possible an employer qualifies for ERC for the entire calendar quarter if business operations were suspended due to a government order during part or all of the 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 should keep payroll records that support their claim,” advises the IRS.
• Citing a non-qualifying government order. Just because restrictions were imposed on some businesses in an area doesn’t mean any employer qualifies for ERC. The COVID-related suspension must have applied to the business for it to qualify for ERC.