IRS Publishes New List of “Warning Signs” for Fraudulent ERC Claims
Posted in Offshore Account Update on July 31, 2024 | Share
The Internal Revenue Service (IRS) recently published a new list of “warning signs” for fraudulent Employee Retention Credit (ERC) claims. This list adds to the IRS’ previous list published in May. As Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, the new list highlights the IRS’ ongoing prioritization of ERC fraud and the scope of its efforts to uncover and prosecute fraudulent claims.
“Warning Signs” for ERC Fraud According to the IRS
The IRS’ new list, published on July 26, 2024, identifies five “signs of an incorrect ERC claim.” These signs are:
1. Essential Businesses that Did Not Experience a Decline in Gross Receipts During the COVID-19 Pandemic
To qualify for the ERC, a business must have experienced a disruption of its operations that resulted in a decline in gross receipts during the COVID-19 pandemic. The IRS appears to be specifically targeting businesses that claimed modifications to their operations that did not restrict their ability to operate, “like requiring employees to wash hands or wear masks.”
2. Businesses that Are Unable to Show that a Government Order Caused a Full or Partial Suspension of Operations
Businesses claiming the ERC were also required to be able to show that a government order caused full or partial suspension of their operations. According to the IRS, “[w]hen asked for proof on how the government order suspended more than a nominal portion of their business operations, many businesses haven’t provided enough information to confirm eligibility.”
3. Businesses That Reported Family Members’ Wages as Qualified Wages
As the IRS makes clear, “[w]ages paid to related individuals aren’t qualified wages for the ERC.” Related individuals include businesses’ majority owners and their spouses, children, parents, siblings and other family members.
4. Businesses that Used Wages Previously Used for Paycheck Protection Program (PPP) Loan Forgiveness
The IRS is also pursuing ERC fraud charges in cases in which businesses used wages previously used for Paycheck Protection Program (PPP) loan forgiveness to claim the credit. As the IRS explains, “[i]f SBA forgave the loan, businesses can’t claim the ERC on wages that they reported as payroll costs to get PPP loan forgiveness.”
5. Large Employers that Claimed Wages for Employees Who Provided Services
“Large employers” were only permitted to claim the ERC for employees who were not providing services during the pandemic. For ERC-related purposes, a “large employer” is a company that averaged more than 100 full-time employees in 2019 and claimed the ERC in 2020 or averaged more than 500 full-time employees in 2019 and claimed the ERC in 2021. According to the IRS, “[m]any large employers’ claims incorrectly included wages for employees who were providing services during these periods.”
Request an Appointment with Washington D.C. Tax Attorney Kevin E. Thorn
Our firm is actively assisting businesses of all sizes with ERC-related risk mitigation. If you need to know more about the IRS’ ongoing efforts to uncover and penalize ERC fraud, please call 202-349-4033 or contact us online to request an appointment with Washington D.C. Tax Attorney and Managing Partner Kevin E. Thorn.
