Red Flags You Might Have an Employee Retention Credit Eligibility Problem
- Richard Krause
- Jan 26
- 3 min read
Updated: Apr 19
The Employee Retention Credit (ERC) has been a crucial financial support for businesses during the pandemic. However, its complexity has led many to unknowingly make mistakes in their claims. If you’re worried about your ERC eligibility, here are some red flags that could indicate a problem.
Lack of Revenue and COVID Event Review:
If your actual business revenue and COVID-related events weren’t reviewed or asked about in detail, it’s a sign that your eligibility may not have been properly assessed.
Inadequate Payroll Information:
If your payroll data wasn’t properly reviewed or considered, it raises concerns about the accuracy of your claim and whether it meets the IRS criteria.
Missing Business Facts and Records:
If you weren’t provided with a file containing all the necessary business facts and financial records proving your eligibility, you could face problems if the IRS audits you.
Received ERC Without Employees on Payroll:
If you received ERC benefits but had no employees on payroll during the claim period, that’s a major red flag. The credit is based on payroll costs, so this should never happen.
ERC Amount Exceeds Payroll:
Receiving ERC benefits greater than your actual payroll indicates a significant error in your filing. The credit should be proportionate to your payroll expenses.
PPP Loan Mismanagement:
If your PPP loan wasn’t properly excluded from your ERC filing, you may have unintentionally overclaimed ERC, which could lead to penalties or audits.
Tax Preparer Issues:
If your paid preparer did not sign your tax returns as a paid professional or wasn’t involved in the accounting or return preparation business regularly, it could signal a lack of accountability and expertise.
Failure to Include Affiliated Businesses:
If other businesses you own, known as affiliated or commonly controlled entities, weren’t included in your eligibility evaluation, your ERC claim might be incomplete or inaccurate.
Employee Relationship Misunderstanding:
If the number and relationship of your employees weren’t evaluated to determine whether they were “related parties” under federal tax laws, this could be a significant oversight in your ERC eligibility.
Exorbitant Fees:
If your ERC professional charged you a fee based on a percentage of the ERC received (with some fees as high as 40%), you may be overpaying for services that could lead to future complications. Additionally, you could face difficulty if you need to repay ERC funds and the associated penalties.
Fee Agreement Issues:
If your fee agreement stated that you decided your eligibility rather than the professional assessing it, it suggests that your claim may not have been thoroughly reviewed by an expert.
Prepayment of Fees:
If you paid fees before receiving your ERC check, this could indicate that the process wasn’t handled properly or in your best interest.
ERC Check Issues:
If your ERC check was sent directly to someone else, that’s a red flag indicating possible fraud or mismanagement.
Unqualified Professionals:
If your ERC professional did not sign your forms, is uninsured, or isn’t regularly involved in the tax preparation or accounting industry, they might not be qualified to handle your claim.
Failure to Amend Tax Returns:
If you weren’t informed that your business income tax returns must be amended because you received the ERC benefits, it shows a lack of proper guidance during the process.
Suspicious Activities or Missing Professionals:
If you become aware of suspicious activities related to your ERC claim, or if the professional who helped you is unreachable, unresponsive, or involved in legal issues, it’s a clear warning sign.
What to Do Next?
If any of these red flags apply to you, it’s important to take action. The IRS can audit your claim, and errors could result in penalties, interest, or the need to repay funds. To protect your business and ensure compliance, consider working with a qualified tax professional to review your claim, amend any errors, and confirm your eligibility.
Remember, the ERC is a valuable credit—but getting it wrong could lead to costly mistakes down the line. Don't wait for an audit to raise these concerns—act now to ensure everything is in order.
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