ERC Enforcement Could Leave Businesses at Risk for Audit and Penalties

Sue Schloemer

Feb 05, 2024

As the IRS ramps up efforts to address ineligible claims for COVID-related payroll relief, many small and midsize businesses who applied for funds under erroneous or narrow criteria could face an increased risk of audits and penalties.

In December, the agency outlined steps being taken to address what it described as “dubious” claims filed under the Employee Retention Credit (ERC), including the issuance of 20,000 letters to a first group of taxpayers whose claims fell outside of “basic criteria for the credit.”

The recipients are identified as taxpayers who filed on behalf of entities that were not in existence or did not have employees for the eligible time period. The letters are part of the agency’s effort to mitigate the effects of “misleading” marketing campaigns by “tax professionals and others” who aggressively promoted the ERC to businesses that were not eligible. The next phase of the crackdown will include “intensifying audit work and criminal investigations on promoters and businesses filing dubious claims,” the agency said in its December 6 announcement.

Help for Taxpayers Who May Have Submitted Ineligible Claims

In the meantime, businesses who applied for the credit but did not receive a payment, or received a check but have not deposited or cashed it, may be able to withdraw their claim under a special withdrawal process that will treat withdrawn claims “as if they were never filed.” Those who already received and deposited funds have until March 22 to apply for assistance under the agency’s voluntary disclosure program.

Businesses who suspect they may have filed an ineligible claim or received funds under an ineligible claim are encouraged to talk to a trusted tax professional to determine the best steps for mitigating their risk.

Many businesses who filed ineligible claims did so under a narrow provision that required losses due to a full or partial suspension of operations as the result of a government order limiting commerce, travel, or group meetings.

As the IRS has made clear, few people will qualify under this provision; delays and supply chain hurdles and inconveniences that can’t be tied to a specific government order are insufficient grounds to qualify. On the other hand, if you filed under the provision for declining gross receipts during the appropriate time, your claim is based on a more easily demonstrated factual scenario.

Either way, if you have concerns about an ERC claim, you should seek professional guidance as soon as possible. If repayments become necessary, they may come with added interest and penalties.

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Tax credits and IRS provisions are complex. It is important to remain in compliance while taking advantage of tax savings opportunities. Strategic tax planning can play a key role in opportunities for savings and preventing tax surprises at year end.

To learn more about Kirsch CPA Group’s tax strategy and business advisory services for growth-minded entrepreneurs, contact one of our team members.

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