The Employee Retention Credit (ERC) has provided significant financial relief for eligible employers, but claiming it incorrectly can lead to IRS audits, repayment demands, and penalties. With billions of dollars issued through the program, compliance is under increased scrutiny. Business owners who understand and follow ERC rules can protect their refunds and avoid costly mistakes.
Why Compliance Matters
The Employee Retention Credit is a refundable tax credit, not a loan. This means the IRS issues refunds based on your eligibility and documentation. However, because the program is generous, it has also attracted misuse—whether intentional or accidental. Following compliance best practices ensures that your claim stands up to IRS review.
Keep Detailed Documentation
Strong documentation is your first line of defense in an audit. For the Employee Retention Credit, you should maintain:
- Payroll records showing qualified wages and health plan costs.
- Revenue reports comparing each quarter to 2019 to show declines.
- Government orders that caused full or partial suspensions of operations.
- PPP loan records if applicable, showing that ERC wages are not double-counted.
Keep these records for at least four years after claiming the ERC.
Understand Eligibility Requirements
One common compliance error is misunderstanding the Employee Retention Credit eligibility rules. To qualify, your business must have experienced either:
- A significant decline in gross receipts, or
- A full or partial suspension of operations due to a government order.
These requirements must be met for each quarter claimed, and they are not interchangeable unless both apply.
Avoid Double-Counting Wages
If your business received a Paycheck Protection Program (PPP) loan, ensure that wages used for forgiveness are not also claimed for the Employee Retention Credit. Overlapping claims can result in adjustments, delays, or full disqualification of your ERC.
Work With Qualified Advisors
Given the complexity of the Employee Retention Credit, many business owners choose to work with tax professionals experienced in ERC filings. Select advisors who:
- Are familiar with IRS guidance and updates.
- Provide detailed calculations and supporting documentation.
- Offer transparency about fees and processes.
Avoid firms that promise maximum refunds without reviewing your specific circumstances.
Monitor IRS Guidance
The IRS has updated its guidance on the Employee Retention Credit multiple times since the program’s launch. Staying current ensures you apply the correct rules, especially if you are filing retroactively. Relying on outdated information can lead to errors and compliance issues.
File Accurately and Timely
To claim the ERC retroactively, businesses must file Form 941-X for the applicable quarters. Ensure each amended return:
- Matches your documentation.
- Reflects correct calculations.
- Is filed before the statute of limitations expires (generally April 15, 2024, for 2020 claims and April 15, 2025, for 2021 claims).
Prepare for Possible Audits
Even a well-prepared Employee Retention Credit claim can be selected for IRS review. Be ready to:
- Provide requested records quickly.
- Explain your eligibility and wage calculations clearly.
- Demonstrate that your claim aligns with official guidelines.
Conclusion
Compliance is the key to securing and keeping your Employee Retention Credit refund. By maintaining detailed records, understanding the rules, avoiding double-counting wages, and working with knowledgeable advisors, you can file with confidence and withstand IRS scrutiny. The ERC remains a valuable opportunity, but only if claimed correctly—so take the time to ensure your filing is accurate, complete, and fully supported.