7 Warning Signs for Incorrect ERC Claims

Understanding Compliance
Understanding Compliance: 7 Warning Signs Your ERC Claim May Be Incorrect

Key Takeaways

  • Understand the basics of the Employee Retention Credit and its purpose.
  • Identify the seven common warning signs of potentially incorrect ERC claims.
  • Recognize the consequences of filing an incorrect ERC claim.
  • Learn the steps to take if you need to correct an ERC claim.
  • Benefit from aligning with a trusted service provider like ERTC Express for ensured compliance and optimized credit potential.

Understanding ERC Eligibility

The Employee Retention Credit is a form of relief for businesses that kept employees on the payroll during the COVID-19 pandemic. To be eligible, your business must have experienced a significant decline in gross receipts or been subject to a full or partial suspension of operations due to government orders related to COVID-19. It’s not a one-size-fits-all situation, and not every business will qualify for every quarter the credit was available.

What is ERC Eligibility?

Eligibility for the ERC is specific. It includes criteria like experiencing a certain percentage drop in gross receipts compared to the same quarter in the previous year or being subject to government-imposed restrictions. Additionally, only wages that are not covered by the Paycheck Protection Program or other relief measures can be claimed.

Let’s break this down further:

  • If your business’s gross receipts in a quarter of 2020 were less than 50% of what they were in the same quarter in 2019, you may be eligible for the ERC for that quarter.
  • For 2021, the threshold for a decline in gross receipts was adjusted to less than 80% compared to the same quarter in 2019.
  • Government orders that partially or fully suspended your business operations could also make you eligible.

Remember, these are just the broad strokes. There are more details to consider, such as the size of your business and the specific wages that qualify.

What are the 7 Warning Signs for Incorrect ERC Claims?

ERC Eligibility Checklist
ERC Eligibility Checklist: Ensure Your Business Qualifies

Now, let’s examine the common red flags that may indicate an incorrect ERC claim as identified by the IRS:

  1. Claiming for Too Many Quarters: It’s unusual for a business to be eligible for the ERC in all quarters. Excessive claims as prompted by some promoters should be scrutinized.
  2. Non-Qualifying Government Orders: Only specific government orders related to COVID-19 that actually impacted your business operations qualify. Misinterpretations often involve misunderstanding the nature and impact of government orders.
  3. Misguided Employee Counts and Wage Calculations: The IRS warns against claiming the ERC for all wages paid across all employees without considering the specific eligibility requirements, which vary across different periods.
  4. Ineligible Supply Chain Disruptions: Simply facing supply chain disruptions does not qualify a business for the ERC, unless these disruptions strictly meet specific government order criteria.
  5. Overstated Qualifying Periods: Claiming the ERC for entire tax periods when only partial qualifications apply can lead to inaccuracies. Ensure only the specific impacted periods are claimed.
  6. Claims Without Wage Payments or Non-Existent Businesses: ERC claims require actual wage payments during the claim period. Claims from businesses that were not operational or did not pay wages during these periods are invalid.
  7. Promises of No-Risk Claims: Be cautious of promoters who claim there is nothing to lose by filing for the ERC. Incorrect claims can lead to significant financial liabilities including repayments, penalties, and interest.

Addressing these issues carefully will help ensure your ERC claims are accurate and compliant, minimizing risks of audits and penalties.

Consequences of Incorrect ERC Claims

Submitting an ERC claim that doesn’t adhere to the guidelines can lead to several negative consequences. If the IRS determines that your claim is incorrect, your business could be facing:

  • Repayment of the credit amounts received, with additional interest.
  • Penalties for erroneous filings, which can further strain your financial resources.
  • An IRS audit, which can be time-consuming and require additional documentation and justification.
  • Potential damage to your business’s reputation if found non-compliant with tax laws.

It’s clear that the stakes are high, and therefore, ensuring your claim is accurate and compliant is not just a good practice—it’s essential.

Steps to Correct Incorrect ERC Claims

If you’ve spotted any warning signs in your ERC claim or have been contacted by the IRS, it’s crucial to take swift action. Here’s how to properly address and correct any discrepancies:

Step-by-step Guide: How to Rectify Incorrect ERC Claims:


Begin by meticulously examining your ERC claim. Ensure it aligns with the eligibility criteria for each applicable period, understanding all requirements thoroughly.


Compile all essential documentation such as payroll records, tax filings, and any relevant orders from authorities that impacted your business operations. These documents are vital for the rectification process.


Engage with a credible tax advisor knowledgeable about the ERC. They will assist in reviewing your claims and pinpointing any areas that might raise concerns.


If errors are identified, prepare and submit amended tax returns to correct the inaccuracies in your initial filings.


Should the IRS reach out for further information, respond promptly and provide any additional details they require.

STEP #6: Learn about disclosure programs.

Consider utilizing IRS disclosure programs that offer relief for those who proactively address errors in their claims.


Keep abreast of any updates in tax laws and guidelines to prevent similar mistakes in the future.

By following these steps, you can effectively resolve issues with your ERC claim and lessen any potential negative impacts.

Correcting Employee Retention Credit
Correcting Employee Retention Credit: Steps to Correct Incorrect ERC Claims

Prevent Future ERC Errors with ERTC Express

Ensuring accuracy and compliance with your ERC claim doesn’t have to be a daunting task. Services like ERTC Express are designed to assist businesses in learning the complexities of the ERC. Here’s why you can trust ERTC Express:

  • IRS Compliance: ERTC Express stays current with IRS guidelines to ensure your claim is compliant.
  • Trusted by the AICPA: The American Institute of CPAs recognizes ERTC Express as a reliable source for tax advice.
  • U.S.-Based CPAs: ERTC Express employs knowledgeable CPAs based in the U.S. who understand the intricacies of the tax code.
  • Power of Three – Audit Defense: ERTC Express provides audit defense services to offer reassurance in the event of an IRS review, ensuring peace of mind for our clients.
  • Refund Maximization: Their expertise aims to maximize your eligible credit while maintaining compliance.

By partnering with a service like ERTC Express, you can focus on running your business while they handle the complexities of the ERC.

Avoid Future ERC Mistakes
Avoid Future ERC Mistakes: Ensure Accuracy with ERTC Express

Frequently Asked Questions (FAQ)

What Constitutes a Red Flag in ERC Claims?

A red flag in an ERC claim could be anything that suggests the claim does not meet the IRS’s eligibility requirements. This includes overstating eligible wages, claiming for too many quarters, or not having sufficient documentation to support the claim.

How Do I Know If My Business Qualifies for the ERC?

To be eligible for the ERC, assess if your business had a considerable drop in gross receipts or faced partial/full suspension due to COVID-19 government orders. Seeking advice from a tax expert is advisable to evaluate your unique circumstances effectively.

What Steps Should I Take If I’ve Filed an Incorrect ERC Claim?

If you’ve filed an incorrect ERC claim, you should review your claim thoroughly, gather all relevant documentation, consult a tax professional, amend your tax returns if necessary, respond to any IRS inquiries, and stay informed about the latest tax laws and guidelines.

How Can ERTC Express Assist in Ensuring Compliance?

ERTC Express can help ensure compliance by providing expert guidance on the ERC, staying up-to-date with IRS guidelines, and offering services like audit defense and refund maximization.

How Long Do I Have to Amend an Incorrect ERC Claim?

The time frame to amend an incorrect ERC claim typically aligns with the statute of limitations for tax returns, which is generally three years from the date you filed your original return or two years from the date you paid the tax, whichever is later. It’s important to act quickly if you see an error in your claim.   

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