Did Your Company Improperly Claim the COVID-19 Employee Retention Credit?

The employee retention credit was available to qualifying businesses in 2020 and 2021 to help offset the costs of keeping employees on staff during the height of the COVID-19 pandemic. The rules and restrictions governing the employee retention credit changed over time, and, as a result, it is likely that some businesses (if not many businesses) claimed the credit improperly.

So, did your Virginia business claim the employee retention credit improperly? If so, what does this mean for your business’s risk of facing an IRS audit?

5 Potential Mistakes When Claiming the Employee Retention Credit

Here are five potential mistakes when claiming the employee retention credit that could lead to IRS scrutiny:

1. Claiming the Employee Retention Credit Despite Ineligibility

To be eligible for the employee retention credit, employers must have experienced either a business interruption or a decline in gross receipts related to the COVID-19 pandemic. The specific requirements for eligibility varied from 2020 to 2021.  

2. Improperly Calculating “Qualifying Wages”

For both 2020 and 2021, the employee retention credit was only available to eligible employers that paid “qualified wages.” Employers were required to calculate their “qualified wages” for individual employees on a quarterly basis.

3. Exceeding the Employee Retention Credit Cap

The employee retention credit was subject to a cap, which employers were also required to calculate for individual employees on a quarterly basis. For example, for the first and second quarters of 2021, the cap was $7,000 per employee per quarter.

4. Using the Wrong Eligibility Criteria or “Qualified Wages” Calculation

The eligibility criteria for the employee retention credit and the definition of “qualified wages” both changed over time. If employers used the wrong criteria or the wrong definition during any calendar quarter, they may have inadvertently underpaid their federal employment tax liability.

5. Claiming the Employee Retention Credit and Treating “Qualified Wages” as Payroll Costs Under the PPP

Under the rules governing the employee retention credit, employers were prohibited from claiming the credit for any “qualified wages” that they treated as payroll costs for purposes of seeking Paycheck Protection Program (PPP) loan forgiveness. However, a provision in the CARES Act making employers ineligible for the credit unless they repaid their PPP loans by May 18, 2020 was repealed by the  Taxpayer Certainty and Disaster Tax Relief Act of 2020.

What if Your Business Improperly Claimed the Employee Retention Credit?

If you are concerned that your business may have improperly claimed the employee retention credit in 2020 or 2021, what should you do? While you have options available, the best option for your business will depend on the circumstances at hand. For example, filing an amended return, seeking an offer in compromise, and making a voluntary disclosure are all options that will make more or less sense under different scenarios.

Request a Confidential Consultation with Business Tax Lawyer Kevin E. Thorn

If you need to know more about the eligibility requirements for the employee retention credit or what your company should do to resolve any potential issues with the IRS, we encourage you to get in touch. To schedule a confidential initial consultation with business tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 703-752-3752, email ket@thornlawgroup.com or contact us confidentially online today.