Top 10 IRS Red Flags to Avoid When Claiming the ERTC

You may have heard that the IRS is cracking down on fraudulent Employee Retention Tax Credit (ERTC/ERC) applications and that the agency has even ordered a moratorium on the processing of new claims through the end of the year. This move came amid concerns of “improper” or “ineligible” claims being sent to the IRS. If you’re a business owner who hasn’t yet applied for the ERTC, there are some red flags you’ll want to avoid in your application so the IRS doesn’t find a reason to audit it. 

IRS Red Flags for Businesses to Avoid When Claiming the ERTC

1. Missing Documentation 

The name of the game with Employee Retention Tax Credit applications is documentation. You need to include every piece of information the IRS could possibly want to avoid suspicion from the agency. 

2. Discrepancies in Income or Expenses

Having all the documentation you need for your claim is only part of the challenge of claiming the ERTC. You’ll also need to be sure there are no discrepancies in income or expenses between different tax forms for your business. 

3. Disproportionate Gross Receipts Claims

Claiming a disproportionately large drop in gross receipts on your application could be a red flag for the IRS. 

4. Insufficient Business Operations Suspenion Proof 

Providing insufficient proof of disrupted business operations during the COVID-19 pandemic could set off warning bells. 

5. Mathematical Inaccuracies

Rather than a discrepancy between paperwork where the math was done right but didn’t translate between documents, a mathematical inaccuracy overall in your tax documents could turn out to be a huge problem. Make sure to double and triple-check all of your math to be sure it’s correct. 

6. Company Status

This should be obvious, but the IRS is going to check that your business is properly registered and that information they may need, like an Employee Identification Number and up-to-date taxes, can be looked up easily. Make sure this is all in order and reported correctly to avoid the ire of the agency. 

7. Failure to Amend Returns

The IRS may check if a business owner who received ERTC went back and amended their income tax returns as a result of the tax credit. Taxpayers who didn’t remit any back taxes owed as a result might raise red flags and trigger an audit. 

8. Inadequate Business Impact 

In order to qualify for the Employee Retention Tax Credit, a business needs to have partially or fully shut down due to a government order because of the COVID-19 pandemic during 2020 or the first three calendar quarters of 2021, or experienced a significant decline in gross receipts during the eligibility periods during 2020 or the first three calendar quarters of 2021. If you try to claim an impact on your business that doesn’t seem equal to a full or partial shutdown of operations, that’ll give the agency reason to be suspicious of your claim.

9. Type of Industry 

The IRS may assume that certain industries are more at risk for fraud when it comes to the ERTC. IRS auditors may take a second look at industries that seem like they should have been less affected by COVID-19-related shutdowns. But if you’re unsure if your specific field may be more prone to suspicious filings, you might want to work with a professional ERTC tax team to make sure your application avoids any particular areas of concern. 

10. Historical Reporting Discrepancies

The IRS has access to your business’ wage history and what sort of revenue it has earned historically. If the numbers you report to try to claim the ERTC for certain quarters in 2020 and 2021 don’t add up, you’ll likely raise eyebrows at the federal agency. This is another reason to keep accurate reporting data and to have any possible documentation the IRS may ask for at the ready. 

Applying for the Employee Retention Tax Credit may seem stressful, especially given the advanced current scrutiny of the IRS. But if you work with a team of trusted tax professionals, like the one at Dayes Law Firm, you’ll have less reason to worry about raising red flags in your application. 

Please contact us for a free, no-obligation consultation about the ERTC. We can answer any questions you may have about the application process and red flags your business should avoid when claiming the tax credit. Give us a call today!