IRS Releases Additional ERC Red Flags, Foreshadowing Improved Enforcement

ERC audit results are flowing in, with the IRS adding five “warning signs” to its previously identified seven. Beyond the mild amusement of the IRS identifying 12 warning signs for ERC – a transaction on the IRS’ Dirty Dozen list – the announcement points to improved future enforcement and teases of a new ERC voluntary disclosure program.

On July 26, 2024, the IRS shared five new warning signs for taxpayers to heed based on the IRS’ auditing of ERC claims. A full copy of the IRS news release is linked HERE. The new red flags cover these areas:

1. Essential businesses that could fully operate and didn’t have a decline in gross receipts. The IRS believes promoters convinced many essential businesses to claim the ERC when, in many instances, essential businesses weren’t eligible because their operations weren’t fully or partially suspended by a qualifying government order. The IRS contends that modifications that didn’t affect an employer’s ability to operate, like requiring employees to wash hands or wear masks, doesn’t mean the business operations were suspended.

2. Business unable to support how a government order suspended business operations. Whether a business was fully or partially suspended depends on its specific situation. The IRS has often found, however, that when it asked for proof on how the government order suspended more than a nominal portion of their business operations, many businesses were not able to provide enough information to confirm eligibility.

3. Business reporting family members’ wages as qualified wages. If business owners claimed the ERC using wages paid to related individuals, those claims are likely for the wrong amount or ineligible. Wages paid to related individuals aren’t qualified wages for the ERC.

4. Business using wages already used for PPP loan forgiveness. Participating in the PPP affects the amount of qualified wages used to calculate the ERC. Payroll costs up to the amount SBA forgave aren’t eligible for ERC. Taxpayers can use the rest of their qualified wages to figure their credit.

5. Large employers claiming wages for employees who provided services. Large eligible employers can only claim wages paid to employees who were not providing services. Many large employers’ claims incorrectly included wages for employees who were providing services during these periods.

   1. Large employers are those that averaged: a.  more than 100 full-time employees in 2019 and claimed ERC for 2020 tax periods, and/or
   2. more than 500 full-time employees in 2019 and claimed ERC for 2021 tax periods.

In a previous blog post, linked HERE, we outlined the seven other warning signs identified by the IRS.

The IRS’ news release was not all doom and gloom. The IRS stated that is “in the final stages” of reopening the ERC Voluntary Disclosure Program for a brief period. Stay tuned for further details as they become available.

If you have any questions about this Blog post or any other Treasury, IRS or tax-related matter, feel free to contact me directly at (214) 749-2464 or adaddino@meadowscollier.com.