Ensure Compliance to Avoid IRS Scrutiny on ERTC Claims: Beware of These Common Red Flags
While the Employee Retention Tax Credit (ERTC) has been helpful for businesses experiencing the negative impact of COVID-19 and a helpful financial relief source for businesses, it has also generated a fair amount of controversy regarding compliance concerns. In July 2023, the IRS released guidance to reduce ERTC fraud, targeting primarily compliance issues on this scheme. Recently, the IRS released five red flags commonly associated with false ERTC claims. Being aware of such indicators will assist in preventing compliance issues and subsequent penalties to your business.
Key Red Flags to Watch Out For:
Unsupported Claims of Business Suspension:
A common plea that many companies have made is that a government directive partially or fully shut down their operations during the pandemic. However, most of the time they lack substantiation for such allegations or do not have proper paperwork to back up their allegations. For this reason, it is crucial to keep comprehensive records that would show how government orders impacted your operations in a straight and tangible manner.
Improper Reporting of Family Members’ Wages:
A few companies have wrongly claimed wages paid to their family members as eligible wages for the ERTC. There are particularities that the IRS has concerning which wages can be taken, it is essential to follow these rules to prevent the claims from being disallowed.
Inaccurate Revenue Decline Calculations:
To claim ERTC, business organizations need to show the reduction in gross receipts to the required percentage. Inaccuracies in computing and signaling this decline yield invalid claims. Make sure that the revenues are well estimated and documented properly and that there are backup or previous records.
Lack of Documentation for Qualified Health Plan Expenses:
It is noteworthy that the ERTC permits businesses to include specified health plan costs in their claims. However, due to management negligence or lack of professional advice many business organizations do not document these expenses adequately. Make sure to keep records of all your qualified health plan expenses to support your claim.
Misinterpretation of Eligibility Periods:
ERTC has an eligibility period for the start and the end of the period that is allowed for the credit. Failure to do so means that some claims will be ending before they should while others are active even when they should be ineligible. It is important to familiarise yourself with the specific criteria for inclusion and exclusion as well as the expected timeline when your claims are to be made.
Steps to Ensure Compliance:
Maintain Detailed Records:
It is advisable to maintain detailed records of all the claims and how the government orders influenced the operations, revenue computation, and other qualified expenses.
Review IRS Guidelines:
This means you need to understand the current changes in the IRS regulation and guide the ERTC.
Consult with a Tax Professional:
If you are in any way unclear about any aspect of ERTC, you may want to consult with a tax professional and get more assistance on your claims.
Filing both your ERTC claims well and recording your ERTC documentation correctly can help protect your business from falling victim to an IRS audit or worse – penalties. We encourage anybody with further queries or doubts regarding their ERTC claims to get in touch with us. In general, it is crucial to stay up-to-date and abide by the guidelines to get the most out of the Employee Retention Tax Credit.
For more detailed information about the IRS red flags and compliance guidelines, refer to the IRS guidance here.
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