Employee Retention Credit

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Tax Problems

The Employee Retention Credit was designed to help businesses keep employees on payroll during COVID-19, but aggressive marketing by ‘ERC mills’ led many businesses to claim credits they didn’t qualify for.

The IRS is now actively auditing these claims and disallowing improper credits—with significant penalties for those who can’t substantiate their claims.

What Was the Employee Retention Credit?

The ERC was a refundable payroll tax credit of up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for certain quarters in 2021. Qualifying businesses either experienced full or partial suspension of operations due to government orders, or met specific gross receipts decline tests.

Why the IRS is Scrutinizing ERC Claims

The IRS has identified significant fraud and improper claims. Aggressive promoters marketed the credit regardless of actual qualification—many businesses were told they qualified based on ‘supply chain disruptions’ or nominal revenue reductions that didn’t meet statutory requirements. The IRS has placed a moratorium on processing new claims while addressing the backlog.

Common ERC Issues

Disputed claims often involve businesses that didn’t actually experience full or partial suspension due to government orders, didn’t meet gross receipts decline tests, claimed wages already covered by PPP loan forgiveness, or made mathematical errors in calculating the credit. Each issue requires careful analysis of specific facts and applicable rules.

ERC Voluntary Disclosure Programs

The IRS has offered voluntary disclosure programs for taxpayers who claimed improper credits, allowing repayment with reduced penalties. Whether voluntary disclosure makes sense depends on your specific situation, the strength of your original claim, and your ability to defend the credit on audit.

If you are facing IRS scrutiny over an Employee Retention Credit claim, contact Boss Tax Law today to discuss your situation.