Employee Retention Credit (ERC) Fraud Claims – During 2023, the IRS has made increasing efforts to prevent fraudulent claims by small businesses for Employee Retention Tax Credits (ERC). In July 2023, the IRS shifted its focus to reviewing ERC claims to ensure it complied with rules and regulations for qualifying to claim the credit. They intensified their audit focus and investigations on non-qualifying claims filed by promoters and businesses. In September 2023, the IRS stopped processing ERC claims through the end of 2023 to allow them to perform enhanced reviews of existing claims submitted to protect against fraudulent claims and protect businesses from penalties and interest associated with those claims. In December 2023, the IRS issued 20,000 letters to taxpayers notifying them that the IRS disallowed their ERC claims.
Since the IRS has intensified its focus on ERC claims, including increased audits of such, taxpayers and businesses should use caution and be informed on the qualifications for claiming the ERC and how to ensure the submitted claims are compliant and qualify for the credit.
Part of the compliance process includes amending the tax returns for the years the ERC was claimed and refunded (2020 and 2021, even though the refunds were received in later years). During the process of amending the returns, the practitioner preparing the amended return(s) has the responsibility to review the documentation and information for the computation of the ERC (even if prepared by a third party) to determine that the computation of the ERC and documentation for such are adequate to support the ERC claimed. The practitioner can rely on the information provided in good faith without verification but should ask the client questions and evaluate the information provided for the calculation of the ERC. If the data appears to be incorrect or not consistent with the qualifications for the ERC the practitioner needs to bring this to the taxpayer’s attention and allow them to take necessary actions to correct the situation.
Some of the items that need to be at the forefront of the entities claiming the credit are: (1) were salaries and wages previously used to claim PPP loans excluded from the salaries and wages used in determining the ERC, (2) were the federal guidelines for determining qualified salaries and wages for the ERC adhered to, (3) were qualifications to determine reduced revenues followed, (4) Were reasons for qualifying other than reduced revenues documented and determined to be correctly used for ERC purposes and (4) were the tax returns with the quarters where ERC was received amended and filed.
This information is not meant to create panic for entities that claimed the ERC; however, it is provided to bring attention to how the IRS targets the ERC claims for incorrect claims and fraud.
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