12 “Warning Signs” for ERC Fraud (According to the IRS)

As the Internal Revenue Service (IRS) continues to prioritize ERC fraud enforcement, it has recently identified several specific issues that are likely to lead to penalties during audits and investigations. By publicly identifying these “warning signs,” the IRS is hoping to encourage business owners to voluntarily address noncompliant filings before they lead to scrutiny. Learn more from New Jersey tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group:

The IRS’ Previous “Warning Signs” for ERC Fraud

The IRS issued an initial list of “warning signs” for ERC fraud in May of this year. According to the IRS’ initial list, the following all present high risks for enforcement:

• Claiming the ERC for too many quarters;
• Claiming the ERC based on non-qualifying government orders;
• Claiming the ERC for too many employees or improperly calculating eligible employees’ qualified wages;
• Claiming the ERC based on supply chain issues;
• Claiming the ERC for too much of a tax period;
• Claiming the ERC when the business didn’t exist or didn’t pay wages during the eligibility period; and,
• Working with a promoter to improperly claim or calculate the ERC.

The IRS’ Additional “Warning Signs” Announced in July 2024

On July 26, 2024, the IRS issued a second list of “warning signs” for ERC fraud. The IRS describes these as, “recurring theme[s] seen on ERC claims.” The IRS’ newly announced red flags for ERC fraud are:

• Claiming the ERC Without Evidence of a Decline in Gross Receipts – To claim the ERC, businesses must be able to demonstrate a decline in gross receipts caused by a full or partial suspension of operations during the COVID-19 pandemic.
• Inadequate Evidence that the Business Experienced a Suspension of Operations Due to a Government Order – The IRS has begun asking businesses to substantiate their claims that they experienced a full or partial suspension of operations due to a government order; and, “[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.”
• Reporting Majority Owners’ and Family Members’ Wages as Qualified Wages – The ERC is only available to businesses that paid qualified wages. Wages paid to majority owners and their family members are not qualified wages under any circumstances.
• Claiming the ERC Based on Wages Used for Paycheck Protection Program (PPP) Loan Forgiveness – As the IRS makes clear, a business “can’t claim the ERC on wages that [it] reported as payroll costs to get PPP loan forgiveness.”
• Claiming the ERC for Employees Who Were Not Providing Services (Large Employers Only) – While small businesses could claim the ERC for eligible employees who were not providing services during the COVID-19 pandemic, “large employers” could not. “Large employers” are businesses 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.

Request a Confidential Consultation with New Jersey Tax Attorney Kevin E. Thorn

Do you have concerns about facing scrutiny from the IRS related to the Employee Retention Credit? If so, we encourage you to contact us promptly for more information. To request a confidential consultation with New Jersey tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 201-842-7696 or inquire online today.