The Employee Retention Credit (ERC), a tax initiative designed to provide relief for businesses that retained employees during the Covid-19 pandemic, remains a significant point of discussion in the media and a target for scrutiny by the Internal Revenue Service IRS. Unfortunately, this well-intentioned program, established to alleviate financial strain during challenging times, has also attracted fraudulent activity.
As some unscrupulous individuals attempt to exploit this scheme, the IRS has issued a warning to those who might fall prey to such scams. It is essential for companies and individuals to remain vigilant and informed about the proper usage of the ERC to prevent any inappropriate claims.The IRS offers several straightforward protective measures to help businesses safeguard themselves against wrongful ERC claims and prevent falling into any fraudulent traps.
IRS Employee Retention Credit (ERC): Eligibility and Claim Process
The Employee Retention Credit (ERC) functions in a specific way. It applies to employers eligible to pay their employees qualified wages between March 12, 2020, and January 1, 2022. To qualify, businesses need to prove that they were forced to close due to a government mandate during the pandemic throughout 2020 or within the first three quarters of 2021, or that there was a noticeable drop in gross receipts during these periods. Certain businesses may also be eligible as recovery startup businesses in the third or fourth quarters of 2021, although the ERC relief was largely phased out by Congress for this timeframe.

Should your business have experienced a forced shutdown or significant reduction in receipts while continuing to pay employees, you may be eligible to claim the ERC. The credit comprises 50% of up to $10,000 in wages per employee, indicating a maximum credit of $5,000 per employee for 2020 and up to $21,000 per employee for 2021. The total potential credit of $26,000 per employee is often emphasized.
The ERC is accessible to a broad range of businesses, inclusive of tax-exempt entities. It, however, does not apply to individuals, including freelancers and independent contractors.
Certain limitations do exist. For instance, businesses cannot include wages funded by a PPP (Paycheck Protection Program) loan when determining wages eligible for the ERC.
Claiming the ERC: Deadlines, Progress, and IRS Guidance on Rules
The initial purpose of the credit was to provide immediate financial assistance to businesses experiencing a downturn. As a result, businesses could claim the credit when filing their payroll tax returns. However, eligible businesses that did not initially take advantage of this benefit can still claim the ERC on an amended payroll tax return for the specified period.
Under the normal statutes of limitations, businesses have until April 15, 2024, to file amended returns for 2020, and until April 15, 2025, for all 2021 quarters. These deadlines are approaching, so eligible businesses should act quickly to reap the benefits.
Since the inception of the program, the IRS has received over 2.5 million ERC claims. The IRS reported substantial progress in processing these claims this year, with 99% of claims being about three months old as of mid-July.
However, processing the amended returns is taking some time. As of July 12, 2023, there were approximately 442,000 unprocessed amended payroll returns, many of which relate to the ERC. All these returns are being processed at only two locations—Cincinnati and Ogden—where staff are trained to review these returns.
Businesses that make erroneous ERC claims are obligated to repay the amounts. They may also face penalties and interest.
To support tax professionals and others, the IRS continues to provide additional legal guidance regarding the ERC rules. On July 21, a legal advice memorandum was issued by the IRS that applies the statutory requirements to five specific scenarios. The memo clarified that businesses suffering from supply chain disruptions are only eligible for the ERC if they had to suspend their operations because their suppliers, subject to a government order, could not deliver vital goods or materials. This contradicts advice provided by unscrupulous preparers suggesting that any supply chain disruptions would qualify.