The IRS Is Denying Billions in Improper Small Business Claims

Small businesses felt the brunt of the economic pain during the pandemic, with one survey showing that 60% of small businesses were closed for some part of 2020.

To help offset the financial setback, the U.S. government set up the employee retention credit (ERC) program as a refundable tax credit that helped businesses continue to pay employees during shutdowns or who were financially affected by the pandemic.

However, the IRS has denied over 14,000 claims, totaling more than $1.1 billion.

Here's what small businesses need to know about their current ERC claims and what you can do if you need to withdraw them.

Why the IRS is denying many claims

In the early days of the pandemic, someone suggested to me and a group of fellow self-employed workers that we should consider applying for the credit.

I didn't file the ERC claim since it didn't seem to apply to me, and I hadn't lost any work at the time. But it's understandable how some businesses may have been confused about the credit and who could claim it.

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One problem has come from groups the IRS calls "promoters," who've heavily marketed the ERC credit and have convinced many small businesses to apply for credits even if they don't qualify for them. The IRS says some promoters are still pushing small businesses to apply, calling the credit a grant, business stimulus payment, or government relief program.

The IRS recently said that it still has 1.4 million unprocessed ERC claims, which means potentially more will be denied if they're not legitimate.

For now, the IRS moratorium that began last year on new ERC claims is still in effect. If you're planning to file a claim in the future, the IRS released some warning signs that an ERC claim may be incorrect. You can check out the entire list, but it includes the following red flags:

• Claiming the credit for all the quarters it was available, which is uncommon
• Claiming the credit just because a shutdown order was implemented in your area
• Making an ERC claim for all wages for all employees on your payroll
• Citing supply chain issues to claim the credit
• Claiming the credit for too much of a tax period

What to do if your small business submitted an incorrect ERC claim

The IRS has said that ERC is "one of the most complex credits" it's ever administered, so it's not surprising why so many small businesses have been confused by it.

Thankfully, the government has set up a withdrawal program on the IRS website where you can remove your claim if you believe it's incorrect.

You can ask to withdraw your claim if all of these apply to you:

• You made the ERC claim on an adjusted employment tax return
• You filed your adjusted return to claim the ERC and made no other adjustments
• You're withdrawing the entire amount of your ERC claim
• The IRS hasn't paid your claim
• If the IRS has paid your claim, but you haven’t cashed or deposited the check

If your small business needed the ERC, the program was a helpful tool to keep many businesses afloat. But just be cautious if anyone tells you that you can continue claiming these credits or if they encourage you to fill out the claims even if you don't qualify.

If you're unsure whether you qualify or believe you may have filed an incorrect ERC claim, talking to a tax professional to figure out your next steps is a smart move.