ERC Updates: Is Your Business at Risk for Improper Claims?

The Employee Retention Credit (ERC) was introduced to support businesses facing challenges due to the pandemic. However, the rush to claim this credit led many businesses to inadvertently make errors in determining eligibility, resulting in improper claims. 

As the IRS ramps up efforts to review and recover these credits, it’s crucial for businesses to understand the potential issues, the current IRS review process, and how G&S Accountancy can assist in getting back on track.

Why Are ERC Claims Facing Increased Scrutiny?

Many businesses and their advisors miscalculated their eligibility for the ERC due to confusing guidelines and the program’s evolving nature. Errors in determining eligibility can lead to serious financial consequences if not addressed promptly.  Recently, the IRS has introduced programs for recovering improperly claimed credits, giving businesses an opportunity to repay a portion of their claims and avoid penalties—but these options require careful evaluation. A key reason for these errors has been a lack of clarity on the qualifying criteria, especially regarding the specific time periods and conditions required for eligibility. This has been further complicated by some third-party advisors who promised results without fully understanding the program’s rules.

IRS Actions and Compliance Challenges

The IRS has rolled out several initiatives to address improper ERC claims:

• 80 Percent ERC Payback Scheme

The IRS introduced an 80 percent payback program, allowing businesses that recognize their claim was incorrect to voluntarily return 80% of the credit while keeping the remaining 20%, tax-free. This also includes keeping any interest received on the claim, although the interest itself is taxable. Businesses must act quickly to meet the deadlines, such as requesting an adjustment by March 22, 2024, and signing a closing agreement within ten days of receiving it from the IRS.

• The 85 Percent Payback Program for 2021 Claims

In addition to the original program, the IRS has launched a second initiative for 2021 ERC claims, requiring businesses to pay back 85% of the improperly claimed credit while keeping 15% tax-free. Strict eligibility criteria apply, including the requirement that businesses must not be under any IRS criminal investigation or employment tax examination for the 2021 tax year. Applications must be submitted by November 22, 2024.

• Legislative Impact: H.R. 7024

Pending legislation, H.R. 7024, could significantly impact ERC claims by increasing penalties for ERC-related errors and extending the statute of limitations to six years, allowing the IRS more time to assess and recover improper claims.

• Processing Delays and IRS Backlog

The IRS is currently dealing with a substantial backlog of ERC claims, with approximately 1.4 million still unprocessed as of September 2024. While some businesses are starting to receive payments, many remain in limbo. Additionally, the IRS has begun issuing disallowance letters, some of which may contain errors, leading to complications for businesses awaiting refunds.

What Could Go Wrong with Your ERC Claim?

Improper ERC claims can arise from various sources, including:

• Misinterpretation of Eligibility Criteria: 

Many businesses misunderstood the requirements for eligibility, especially concerning revenue decline thresholds or impacts on operations. This led to incorrect claims for ineligible periods.

• Over-Reliance on Third Parties: 

Some businesses relied on advisors who guaranteed ERC refunds without a thorough evaluation of eligibility. Now, the IRS requires businesses to disclose the details of such advisors when participating in voluntary disclosure programs, potentially exposing both parties to further scrutiny .

How G&S Accountancy Inc. Can Help You Get Back on Track

If you suspect that your ERC claim may have been calculated improperly, taking proactive steps before the IRS takes action is critical. We provide comprehensive support to businesses facing these challenges, including those in industries like transportation and logistics and non-profit organizations, which often face unique compliance requirements. Here’s how we can assist:

1. ERC Claim Review and Audit Preparation: 

We perform an in-depth review of your ERC claims to ensure compliance with current IRS guidelines, identify any errors, and recommend corrective actions.

2. Voluntary Disclosure Assistance: 

If you need to participate in one of the IRS’s voluntary payback programs, we will guide you through the process, ensuring all requirements and deadlines are met.

3. Representation and Risk Mitigation: 

If the IRS has already initiated an examination, G&S Accountancy Inc. can provide professional representation to help minimize penalties and negotiate the best possible outcome for your business.

Stay Ahead of Potential Issues

The IRS’s changing approach to ERC compliance highlights the importance of proactive management. Given the potential delays and the risk of disallowance, businesses could face uncertainty for extended periods.  With G&S Accountancy Inc. by your side, you can navigate these uncertainties with confidence, knowing that our experienced team is here to help you stay compliant and mitigate financial risks. Contact G&S Accountancy today to schedule a consultation and ensure your ERC claims are correctly managed, protecting your business from unexpected liabilities.

Frequently Asked Questions:

    1. Why is the IRS scrutinizing ERC claims more closely?

Due to high error rates and evolving eligibility guidelines, the IRS is closely reviewing ERC claims to identify and recover improperly claimed credits. Increased scrutiny aims to ensure businesses comply with the latest requirements and avoid financial penalties.

    2. What is the 80 Percent ERC Payback Program?

This program allows businesses to return 80% of the claimed credit voluntarily while keeping the remaining 20% tax-free. Participating can help avoid penalties and provide a chance to settle any compliance issues proactively.

    3. Who qualifies for the 85 Percent Payback Program for 2021 claims?

Businesses with 2021 ERC claims can repay 85% of the credit while keeping 15% tax-free, provided they aren’t under IRS criminal investigation or employment tax examination. This program offers an alternative for those needing to correct past claims without facing significant penalties.

    4. What issues can lead to improper ERC claims?

Common issues include misinterpreting eligibility criteria, especially revenue decline thresholds, and relying on third-party advisors who may not fully understand ERC rules. These mistakes can lead to unintentional non-compliance, increasing the risk of penalties and repayments.

    5. How can I correct an ERC claim if I suspect errors?

You can seek professional assistance to review your claim, participate in a voluntary payback program, and ensure all documentation aligns with IRS guidelines. Correcting errors early can help mitigate financial risks and streamline compliance.