On February 13, 2024, the IRS issued IR 2024-39 to share warning signs that an ERC (Employee Retention Credit) claim may be questionable warranting further investigation. It is urging taxpayers to revisit their claims and, if questionable, take advantage of its ERC Voluntary Disclosure Program or claim withdrawal process. 

Per this information release, the 7 common red flags of an incorrect ERC claim are as follows:

1. ERC was claimed for all quarters that the credit was available- views this as “uncommon”,
   
   
2. Government orders that do not qualify- OSHA communications generally do not qualify as government shut down orders. See IRS FAQ regarding qualifying government orders.
   
   
3. ERC was claimed on all wages paid to every employee on their payroll for a quarter. Rules changed throughout 2020 and 2021 impacting the credit eligibility calculation.
   
   
4. Relying on supply chain issues as the only basis for qualifying
   
   
5. ERC was claimed for too much of a tax period- only wages paid during the suspension period of a quarter qualify.
   
   
6. ERC claim was filed for a period where the business did not pay wages or did not exist during eligibility period
   
   
7. Relying on an ERC promoter who claim a business has nothing to lose by filing a claim. 

Resolving Incorrect ERC Claims- Time Sensitive- Need to Act by 3/22/24

Any business that determines that an ERC claim was filed in error should consider the following options that are available depending on whether the ERC refund payment has been processed and the check cashed by the taxpayer.

1. ERC Voluntary Disclosure Program (ERC VDP):

This is a voluntary disclosure program that is open through March 22, 2024, that allows taxpayers to repay 80% of the payment that it received for an ERC claim that was made in error. Taxpayers apply for the program by quarter and must do so via their third party payer if one was used to file the employment tax return claiming the ineligible ERC credit.

Qualifying taxpayers must meet all of the following requirements:

• The ERC claim has been processed, paid as a refund, and the check was cashed or deposited, or the credit was applied to the tax period or another tax period. 
• Taxpayer now thinks eligibility for that quarter is zero.
• Taxpayer is not under an employment tax examination by the IRS.
• Taxpayer is not under criminal investigation by the IRS.
• Taxpayer has not been notified by the IRS of an intent to reverse or deny the ERC claim.

Advantages of this program include (1) retaining 20% of the claim which is not taxable as income, (2) retaining the interest paid on the original ERC refund check received (3) IRS won’t examine the ERC on employment tax returns for tax periods accepted into ERC-VDP program and (4) amended income tax return not required to reduce wages (if one was not yet filed).

Further information on how to apply for the ERC Voluntary Disclosure Program can be found at: https://www.irs.gov/coronavirus/employee-retention-credit-voluntary-disclosure-program#apply

2. Withdrawing the Employee Retention Credit Claim
Eligible taxpayers include those that submitted an ERC claim where the claim has not yet been paid, or where the refund check has not been cashed. 

Per the IRS website, a taxpayer can ask to withdraw an ERC claim if all of the following apply:

• The claim was made on an adjusted employment tax return (Forms 941-X, 943-X, 944-X, CT-1X).
• The adjusted return was filed only to claim the ERC, and you made no other adjustments.
• You want to withdraw the entire amount of your ERC claim.
• The IRS has not paid your claim, or the IRS has paid your claim, but you haven’t cashed or deposited the refund check.

The procedures for requesting an ERC claim withdrawal depends on whether or not the claim is under audit and whether or not a check was issued (but not yet cashed). IRS website provides guidance on withdrawing claims depending on the taxpayer’s particular situation. 

Claims that are fully withdrawn will be treated as if they were never filed and the IRS will not impose penalties or interest. Taxpayers are not however exempt from potential criminal investigation and procescution if found to have willfully filed a fraudulent ERC claim.