IRS ERC Crackdown: 9 Red Flags Business Owners Must Review
The IRS is intensifying audits of Employer Retention Credit (ERC) claims. With over a million ERC applications received, totaling $86 billion in credits, the IRS is carefully scrutinizing each claim. Here are nine red flags that could trigger an audit of your ERC claim and what to watch out for.
John Milikowsky, Founder of Milikowsky Tax Law, dives into the details of the IRS ERC crackdowns:
1. Essential Businesses Operating During COVID-19
If your business was deemed essential and continued operations during the pandemic without a significant decline in revenue, your ERC claim might be flagged. Essential businesses, like construction or healthcare, often do not meet the criteria for partial or full suspension. The IRS will require evidence proving how COVID-19 affected your operations.
2. Inability to Prove Government-Mandated Suspension
Businesses must show how a government order directly impacted their operations. For example, if you were in the trade show industry, you could present canceled contracts as proof. Without solid evidence demonstrating how a government order affected your business, the IRS may scrutinize your claim.
3. Including Family Member Wages
Wages paid to family members of a majority owner should be excluded from the ERC calculation. If your ERC claim includes these wages, it could be flagged. Review the data used to calculate the ERC to ensure family member wages are not included.
4. Using Wages for PPP Loan Forgiveness
Wages already used for Paycheck Protection Program (PPP) loan forgiveness or other grants cannot be used again for the ERC. The IRS does not allow double-dipping. Check the wages used for PPP loan calculations to ensure they are not included in your ERC claim.
5. Claiming Too Many Quarters
Your business may not qualify for ERC in all quarters. The IRS requires careful review of each quarter to determine eligibility. If your gross receipts improved in a specific quarter, you may not qualify for that period. Ensure you only claim eligible quarters to avoid issues.
6. Non-Qualifying Government Orders
Voluntary business suspensions without a government order do not qualify for ERC. If you chose to close your business without an official mandate, your claim might be ineligible. Confirm that your suspension aligns with government orders to support your ERC claim.
7. Wages Not Subject to FICA
To qualify, wages must be subject to FICA (Medicare and Social Security) taxes. If your ERC claim includes wages not subject to these taxes, it may be flagged. Verify that all wages in your claim meet this requirement.
8. Including Too Many Tax Periods
Some businesses can only claim ERC for wages paid during the suspension period, not the entire quarter. The IRS looks for clear evidence of start and end dates of the suspension. Review your claim to ensure it accurately reflects eligible periods.
9. Non-Existent Businesses or Fraudulent Claims
If your business did not exist during the eligibility period or you did not pay wages, the IRS will see this as fraud. Accurate and truthful reporting is crucial to avoid severe penalties, including potential criminal charges.
Navigating IRS Scrutiny
The IRS is actively investigating ERC claims and has already opened 450 criminal investigations. If you receive notice from the IRS regarding your ERC claim, seek professional assistance immediately. Milikowsky Tax Law can help you navigate the complexities of IRS audits and ensure compliance.
Need Help?
If you’re facing an ERC audit, contact John Milikowsky at Milikowsky Tax Law for expert guidance.
