Last Updated on: 20th October 2023, 07:18 pm

Employee Retention Tax Credit Fraud: Frequently Asked Questions

The Employee Retention Tax Credit (ERTC) was created by the CARES Act in 2020 to help businesses retain employees during the COVID-19 pandemic. However, this tax credit has also led to a lot of fraud. The IRS is cracking down on ERTC fraud and has made it a top priority.

If you claimed the ERTC, you may be worried about getting audited. Or maybe you want to claim the credit but aren’t sure if you qualify. This article will cover common questions about ERTC fraud so you can make informed decisions.

What is the Employee Retention Tax Credit?

The ERTC is a refundable tax credit that eligible employers can claim on their quarterly payroll tax returns. It was originally for 50% of wages paid, up to $10,000 per employee for 2020. The credit was expanded in 2021.

To be eligible in 2020, a business had to experience either:

• A full or partial suspension of operations due to a COVID-19 government order
• A significant decline in gross receipts compared to the same quarter in 2019

In 2021, the eligibility rules were expanded. Employers can now claim the ERTC if they experienced a decline in gross receipts of at least 20% compared to the same quarter in 2019.

Why is the IRS Cracking Down on ERTC Fraud?

The ERTC has led to a lot of fraudulent claims. Some estimates say over $100 billion of the credits claimed were improper or fraudulent.^[1] This is for several reasons:

• The credit has generous eligibility rules
• It is “self-certified” meaning employers claim it themselves on their tax returns
• Many taxpayers and tax preparers do not fully understand the complex eligibility rules

Some common ways businesses commit fraud is by:

• Claiming the credit when they did not experience an eligible decline in gross receipts
• Claiming wages for employees who were not actually working (e.g. furloughed employees)
• Claiming the credit multiple times on amended returns

The IRS is using advanced data analytics to identify suspicious claims. There are also criminal investigations and civil audits underway. The IRS warns they will assess penalties and interest for incorrect claims.

How is the IRS Detecting Fraudulent Claims?

The IRS is using advanced data analytics to flag suspicious ERTC claims for further review. Some things they look at include:

• Large/unexpected changes in gross receipts or tax liability
• Claiming credits for employees who received PPP loan forgiveness
• Claiming credits for employees not actually working
• Multiple amended returns with increased ERTC claims

The IRS also cross-checks applications against third-party data. For example, they verify gross receipts against sales tax filings. They also verify wages against W-2’s and unemployment claims.

In addition to audits, there are several criminal investigations by the IRS Criminal Investigation Division. These involve prosecuting taxpayers for intentional fraud and identity theft.

What Penalties Apply for Fraudulent Claims?

If the IRS determines you claimed ERTC improperly, you will have to repay the full amount plus interest. You may also be subject to penalties.

Some potential penalties include:

• Accuracy penalties – 20% penalty for negligence or disregard of rules
• Fraud penalty – 75% penalty for fraudulent claims
• Preparer penalties – Penalties on preparers who knowingly claim excessive credits

The IRS warns there is no statute of limitations for civil tax fraud cases. The agency can seek repayment at any time in the future if they believe a business claimed ERTC fraudulently.

Should I Claim the Credit if I’m Unsure about Eligibility?

The IRS has warned taxpayers and preparers about the risks of claiming ERTC improperly. It’s important to understand the complex eligibility rules to ensure you qualify.

You should only claim the credit if you’re certain you meet one of the eligibility thresholds. Gross receipts must have declined by the required percentage – not just revenue or profits.

If you’re unsure if your business qualifies, it may be best to consult a tax professional. They can review your financial records and determine eligibility.

It’s better to be safe than sorry. Don’t risk penalties and interest down the road if the IRS determines you claimed the credit improperly.

What Should I Do if I Already Claimed the Credit?

If you’ve already claimed ERTC but now worry you may not have qualified, here are some steps to take:

1. Consult a tax professional to review your eligibility
2. Gather all supporting documents (financial statements, government orders, payroll records, etc.)
3. File an amended return to eliminate any improper claims (Form 941-X or 941)
4. Be prepared to pay back any credit plus interest you were not entitled to

Taking these steps now can help show reasonable cause and avoid penalties if the IRS audits your claims later. Waiting to see if you get audited may result in higher penalties.

Can I Claim ERTC Retroactively?

The ERTC was recently extended to cover all of 2021. This means eligible employers that did not already claim the credit can now claim it retroactively.

However, it’s important to ensure you qualify before amending prior returns. The IRS is closely watching amended returns with newly claimed credits.

As always, maintain good records that prove your eligibility. Work with a tax pro to navigate amending returns to claim ERTC retroactively.

Are There Any Safe Harbors from Penalties?

The IRS has provided penalty relief in certain circumstances if an employer claimed ERTC incorrectly but in good faith.

For example, reasonable cause relief from accuracy penalties may be available if:

• You relied on a qualified tax professional’s advice
• You made efforts to assess your eligibility and claimed in good faith

These penalty waivers are granted on a case-by-case basis. Maintaining good documentation is key to proving good faith efforts and reasonable cause.

Final Thoughts

The ERTC offered much-needed relief for businesses during COVID-19. Unfortunately, it also opened the door to a lot of fraud.

If you’ve claimed the credit, make sure your eligibility calculations and documentation are air-tight. Be prepared for the IRS to scrutinize your claims.

If you’re considering claiming ERTC retroactively, consult a tax pro first. Don’t risk penalties by claiming credits you don’t qualify for.

Stay up to date on the latest IRS guidance and enforcement efforts. With proper planning, you can minimize any risk from ERTC audits.

Sources:

1. https://www.cbsnews.com/news/covid-relief-fraud-treasury-inspector-general-report/
2. https://www.irs.gov/coronavirus/employee-retention-credit
3. https://www.irs.gov/newsroom/irs-pursuing-refundable-tax-credit-claims