3 Warning Signs Your Employee Retention Credit (ERC) May Be Audited
In my last post, I talked about the IRS’ moratorium on ERC claims and how to withdraw a claim. In this post, I am going to discuss the big three warning signs that your ERC claim may be looking down the barrel of an IRS audit.
Irregularities in Your Filing
You should review the paperwork submitted on your ERC claim. Here are some questions you should ask about your claim:
- Was the claim package just a couple of pages; did the company provide you with any details on how the claim was computed?
- Did the preparer sign it (a paid preparer is required to sign the claim form)?
- How long did the company preparing your claim take to prepare the return – did they spend any time learning about your business and get supporting documentation?
- Did you pay a large fee upfront or was your payment based on a percentage of the refund obtained?
- Was the company that filed your claim in business for many years or formed right after COVID-19?
These are just some warnings signs that your claim could have problems. You should seriously consider getting a second opinion.
Wages Used for ERC Claim and for PPP Loan Forgiveness
Shady promotors rarely, if ever, tell customers that you cannot claim wages for both PPP Loan forgiveness and the ERC claim. If you obtained a PPP Loan and it was forgiven, then you need to review your claim to make sure that you did not double dip. The IRS is going to.
You should review your claim and look at what wages are treated as qualified wages for purpose of the credit. You should then cross reference those same wages against any loan forgiveness paperwork submitted. The IRS is going to use the amount of wages you claimed was paid using PPP loan funds when reviewing your claim. Even if you had other eligible expenses that could have been claimed on the forgiveness paperwork, you are stuck with the claimed wage amount for PPP forgiveness purposes.
I have already had a business reach out to me where the IRS denied its claim for this exact reason. This was only a short time after their claim was filed. Review both your PPP forgiveness paperwork and ERC claim closely.
Your Claim Cites Supply Chain Issues
This is a big warning flag. Generally, the two grounds to claim the credit are 1) a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, and 2) sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 – to include a suspension related to an inability to operate due to supply chain issues.
Many shady operations are using the supply chain issue as the basis for the ERC claim as they don’t have to prove a drop in income or the existence of a government order suspending operations for the claimant business. The IRS has come down hard on these claims as companies only qualify on the ground of supply chain issues IF the supplier was shut down due to a governmental order.
Check your claim to determine which ground your ERC is based on. If you see the mention of supply chain issues then you should be worried.
Be careful out there. ERC Claims are a huge area of fraud right now and the IRS is actively pursuing companies and tax preparers. If you have an ERC claim, you should talk with your tax adviser or someone who handles ERC claims to make sure you are not at risk of an IRS audit (or worse IRS criminal prosecution).