IRS Shares Warning on 7 Signs of Employee Retention Credit Mistakes

The IRS issued an alert yesterday regarding the most common mistakes that taxpayers make in filing an  Employee Retention Credit (ERC) claim.

Here's a short summary of each of those mistakes:

1. Too many quarters being claimed. If you are relying on a government shutdown, that likely only applied to one quarter. Many ERC promoters took the credit for all quarters.

2. Government orders that don’t qualify. Many promoters claim any government order would automatically qualify you for the credit. However, the IRS continues to show that there has to be a formal order in effect and your operations must have been fully or partially suspended during that time. All farm operations were considered to be essential businesses during the pandemic and we have never found any farm operation to be shut down. If you received an ERC based on your operations being shut down even though you weren't, be forewarned that the IRS will likely find out and you will pay the tax back plus penalties and interest.

3. Too many employees and wrong calculations. Many of these promoters simply took total wages and used that to claim the credit. There are dollar limits and varying credit amounts, and employers need to meet certain rules for wages to be considered qualified wages.

4. Business citing supply chain issues. Almost no farmer could assert this since their supplier was not shutdown. You may have a delay in getting chemicals, seed, etc. but this does not qualify you for the ERC.

5. Business claiming ERC for too much of a tax period. If your gross receipts did not decline enough in the quarter, and you are relying on a government order shutting you down, the only wages that qualify for the credit are wages you actually paid during the shutdown. The remaining wages do not qualify.

6. Business didn’t pay wages or didn’t exist during the eligibility period. This is obvious.

7. Promoter says there’s nothing to lose. If you got your claim processed by a promoter usually contacting you via phone, mail or email, your claim is likely not accurate and you need to review it with your tax advisor.

We normally do not agree with the IRS on much of anything. But when it comes to the ERC, we fully support the IRS on trying to eliminate abuses caused by these promoters. Most of it is the fault of Congress for creating a tax credit that can lead to fraud, but now we have to clean up the mess and it may cost you money.

The IRS does have a process for paying back ineligible ERC claims. If this applies to you, make sure to review with your tax advisor.