How Can Business Owners Avoid $100K ERC Penalties?
Audio version available here (2 min.)
Following years of improper claims and payouts, the IRS has stepped up its auditing game against business owners who purposely file fake Employee Retention Credit claims. With penalties ranging up to an additional 75% of the original credit paid, you could end up with hundreds of thousands of dollars owed to the IRS (on top of potential criminal prosecution). How can business owners prevent this?
1. Understand Eligibility Requirements
Business owners must prove a significant decline in gross receipts in order to qualify. For ERC claims filed in 2021, this threshold is less than 80% of the same quarter in 2019.
2. Calculate Qualified Wages Accurately
Only factor in wages that were paid during periods of decline. Don’t count any wages that may have already been covered by PPP loan forgiveness. If you realize you have calculated qualified wages incorrectly, then we recommend participating in the Voluntary Disclosure Program.
3. Maintain Detailed Documentation
If you are unable to prove a significant decline in receipts, or the amount of qualified wages paid to employees, you are more likely to fail an ERC audit. Keep your records in order and do not dispose of them at this time.
4. Avoid Overly Aggressive Claims
The IRS keeps a close eye on aggressive ERC claims and prioritizes them for audits. Avoid scrutiny by not abusing the ERC’s eligibility criteria.
5. Involve a Trusted Tax Professional
To ensure your ERC claim is accurate and not at risk for an audit, work with a tax expert who has your best interest in mind. Instead of falling for ERC promoter scams, reach out to XQ CPA’s tax professionals.
6. Consider the Voluntary Disclosure Program
The IRS has reopened the Voluntary Disclosure Program for business owners who received a payment for their 2021 ERC claim. This program allows for illegitimate ERC funds to be refunded without risk for penalties, interests, or audits. Only 85% of the credit needs to be repaid. The IRS will accept applications until November 22nd, 2024.
7. Stay Informed
Since the IRS is currently focusing heavily on Employee Retention Credit enforcement, updates continue to be released. The XQ CPA blog will keep you informed so you are up to date on critical ERC news that could affect you.
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Want to pay less taxes? Read XQ CPA's official tax planning guidebook! How to Grow Your Wealth Through Tax Planning.
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