Last Updated on: 20th October 2023, 07:23 pm

Employee Retention Tax Credit Fraud: Understanding the Crime and Penalties

The Employee Retention Tax Credit (ERTC) was created by the CARES Act in March 2020 to help businesses retain employees during the COVID-19 pandemic. While the credit provided vital relief for many businesses impacted by the pandemic, it has also become a major target of fraud. In this article, we’ll break down what ERTC fraud is, how it occurs, the penalties for committing fraud, and steps businesses can take to avoid becoming victims.

What is the Employee Retention Tax Credit?

The ERTC is a refundable tax credit that enabled eligible employers to claim up to $5,000 per employee in 2020 and up to $21,000 per employee in 2021. To be eligible, businesses had to show they experienced a significant decline in gross receipts or were fully or partially suspended due to a COVID-19 related government order[1].

The credit was intended to incentivize businesses to keep employees on payroll. Employers claimed the credit on their quarterly payroll tax returns. If the credit exceeded the employer’s payroll tax liability, the IRS would issue a refund.

The Evolution of ERTC Fraud

When the ERTC was first implemented, fraud was relatively limited. However, amendments made by the Consolidated Appropriations Act in December 2020 significantly expanded eligibility and increased the potential credit amount to $21,000 per employee for 2021.

This expansion kicked off a wave of fraudulent activity from unscrupulous actors seeking to wrongly obtain funds[2]. The IRS has identified common schemes[3]:

• Fictitious Businesses: Fraudsters create fake businesses and file for large ERTC refunds.
• Misstating Eligibility: Businesses that do not meet eligibility criteria are advised to claim the credit anyway.
• Identity Theft: Fraudsters steal employer identification numbers and file for credits.
• Fake Employees: Employers fabricate employees to claim credits for payroll that was never paid.
• Excess Wages: Employers claim credits on wages that exceed what was actually paid.

Avoiding ERTC Fraud as a Business

• Maintain detailed documentation proving eligibility and wages paid.
• Review claims carefully for accuracy before filing.
• Engage reputable tax professionals rather than unknown credit “specialists”.
• Be wary of unsolicited contacts claiming you’re “eligible” for the credit.
• If audited, respond promptly and provide requested documentation.
• Consider using the IRS settlement program if you claimed credits incorrectly.

For employers scammed into claiming credits they didn’t deserve, voluntarily disclosing the issue can help reduce penalties.