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The Spodek Law Group understands how delicate high-profile cases can be, and has a strong track record of getting positive outcomes. Our lawyers service a clientele that is nationwide. With offices in both LA and NYC, and cases all across the country - Spodek Law Group is a top tier law firm.

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Employee Retention Tax Credit Fraud vs Tax Avoidance: Key Differences

By Spodek Law Group | October 18, 2023
(Last Updated On: October 20, 2023)

Last Updated on: 20th October 2023, 07:15 pm

Employee Retention Tax Credit Fraud vs Tax Avoidance: Key Differences

The Employee Retention Tax Credit (ERTC) has been an important lifeline for many businesses during the COVID-19 pandemic. However, as with any government program, there are always some who will try to take advantage illegally. Recently, the IRS has cracked down on fraudulent ERTC claims, while also warning against overly aggressive tax avoidance schemes.

In this article, we’ll break down the key differences between ERTC fraud and legitimate tax avoidance, to help businesses stay on the right side of the law.

What is the Employee Retention Tax Credit?

First, a quick refresher on what the ERTC is. This tax credit was created in 2020 under the CARES Act to help businesses retain employees during COVID-19 shutdowns and revenue losses. It provides a refundable tax credit equal to 50% of up to $10,000 in wages per employee per quarter. So the maximum credit per employee is $5,000 per quarter.

To be eligible, a business must have experienced 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

There are lots of nuances around which employers qualify and how the credit is calculated. But in simple terms, it’s meant to help businesses keep employees on payroll who might otherwise have been laid off.[1]

ERTC Fraud vs Tax Avoidance

The IRS has seen a major surge in potentially fraudulent ERTC claims, likely due to the lure of “free government money.” They recently ordered an immediate halt to processing new claims while they address the issue.[2]

Some signs of potential ERTC fraud include:

  • Claiming the credit despite not meeting the eligibility criteria
  • Inflating the claimed credit amount beyond what the business qualifies for
  • Using fabricated documents or information to claim the credit
  • Identity theft – fraudsters using someone else’s business information to claim the credit

Intentionally submitting false information to the IRS constitutes fraud and can lead to audits, penalties, interest charges, and even criminal prosecution.[3]

Tax avoidance, on the other hand, involves structuring finances and transactions in ways that minimize tax liability while still complying with the law. Some examples of legal tax avoidance with the ERTC could include:

  • Delaying revenue recognition to the next quarter in order to show a larger decline in gross receipts
  • Careful tracking of working hours to maximize the amount of wages eligible for the credit
  • Claiming the credit for contract or gig workers by treating them as employees
  • Splitting a large business into multiple entities to qualify under the small business exceptions

The key difference is that tax avoidance operates in the gray areas and loopholes within the tax law, while outright fraud involves directly disobeying tax laws and regulations.[4]

Warning Signs of ERTC Fraud

The IRS has identified several red flags that may indicate potential ERTC fraud:[5]

  • Unsolicited promotions guaranteeing eligibility for the credit
  • Claims that the application process is quick and easy
  • Upfront fees to claim the credit, especially fees based on the refund amount
  • Refusing to provide documentation supporting the credit calculation
  • Refusing to sign the tax return as the preparer
  • Directing refunds into the preparer’s bank account rather than the taxpayer’s account

Reputable tax professionals will take the time to understand your business operations, ask lots of questions, and provide documentation supporting the credit they claim. Anything less could be a red flag for fraud.

Penalties for ERTC Fraud

If caught, the penalties for ERTC fraud can be severe. At minimum, a business will have to repay any improperly claimed credits, plus interest and penalties. For example, the penalty for filing a fraudulent return is 75% of the unpaid tax.[6]

For large credit amounts, this can be a significant liability. And if the IRS suspects intentional fraud, they may pursue criminal charges for tax evasion, which can result in fines up to $100,000 and imprisonment up to 5 years.

It’s not worth the risk, when a legitimate tax professional can help maximize your credits while staying compliant with the law.

Claiming the Credit Legally

If you believe your business qualifies for the ERTC, here are some tips for claiming it legally:

  • Consult a trusted CPA or tax attorney who specializes in COVID relief programs
  • Be transparent and disclose all relevant information to your tax pro
  • Verify you meet the eligibility criteria before claiming the credit
  • Maintain thorough documentation supporting your credit calculation
  • Claim a credit amount that’s reasonable and supportable under the law
  • Review the return carefully before signing

A qualified tax professional can advise you on steps to maximize the credit while remaining compliant. They can also defend your position on audit, providing a level of protection.

The Bottom Line

The ERTC provides vital financial relief, but claiming it improperly can lead to major liability. Work closely with an ethical tax pro to maximize your credit legally. Legitimate tax avoidance is fine, but don’t cross the line into fraud. Your best bet is full transparency and claiming a credit amount you can comfortably defend.

With some prudence and professional help, you can secure the benefits of this credit for your business.

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