How Does the IRS Determine the Severity of ERTC Penalties?

December 26, 2023
Dayes Law Firm

Thanks to the Employee Retention Tax Credit (ERTC), eligible businesses can claim up to $26,000 in funds per employee. These funds have been a valuable lifeline for small businesses affected by the pandemic. 

As you can imagine, these numbers add up, and the IRS has been scrutinizing employer claims closely, looking for any signs of fraud, miscalculation, or other errors.

Fraud has been a major issue for pandemic-related funds. To date, the IRS suspects approximately $8 billion in fraud, with $2.8 billion stemming from fraudulent ERTC claims. Whether a business willfully files a fraudulent claim or makes an honest mistake, you could incur severe penalties. 

This article gives some guidance on how the IRS determines penalties for issues with ERTC claims. 

Understanding Eligibility Requirements 

Due to the generous nature of the ERTC funds available, there has been a litany of businesses and individuals marketing themselves as ERTC experts who can help you claim the maximum funds available.

There are a couple of overarching eligibility requirements, including that a business must have experienced a significant drop in revenue or a full or partial suspension of operations due to the pandemic. There are, of course, specifics on calculating qualifying wages for each employee, and that’s where businesses can get into hot water. 

How the IRS Penalizes Erroneous or Fraudulent ERTC Claims 

If the IRS suspects that something is amiss with a business’s ERTC submission, it is likely to initiate an audit. Tax audit penalties can include fines, imprisonment, or both. The circumstances behind the claim filing, the amount in controversy, and the intent of the filer or preparer will play a role in the specific penalties. 

Miscalculations 

Mistakes happen, and if you can show your mistake is honest, penalties may be negligible. Depending on the size of the error, you could also incur significant IRS audit penalties and pay interest on IRS audit penalties, too. 

For this reason, it’s strongly recommended to work only with experienced tax preparers or attorneys when filing an ERTC claim. 

Improper Documentation 

Not having the right documentation can result in significant penalties, both for being unable to prove qualifying wages and not complying with filing requirements. It’s always a good idea to keep careful records to avoid missing ERTC filing deadlines. You won’t face late filing penalties, but you could make yourself ineligible for the funds. 

Lack of Required Information 

The IRS is strictly scrutinizing each ERTC claim that crosses its desk, especially if the claim amount is relatively large. To avoid ERTC penalties, keep a complete record for each employee for which you are claiming ERTC funds, including their social security number, hours worked, etc. 

Failure To Retain Records 

Resist the temptation to shred your documentation after filing for an ERTC claim. In the event of an audit, you’ll need to be able to reproduce records for the IRS to review. It’s recommended to keep records for three years after filing, though the IRS may go back up to six years for general tax returns. 

Requesting an Audit Reconsideration 

Ultimately, the IRS is still run by human beings, and humans are prone to error. If you disagree with the results of the audit or you have new information to prove your claim eligibility, you can write a letter to the IRS. Your letter should include the reasons you disagree with the audit results and additional documentation to support your case. 

Contact an Experienced Tax Attorney for Help with ERTC Claims 

At Dayes Law Firm, we have helped businesses claim $250 million in ERTC funds to date. It is imperative to work with a trustworthy, experienced firm that knows the latest ERTC guidelines. 

Give us a call at (800) 503-2000 or fill out our online form to schedule your free consultation today!