What Are the Penalties for an Improperly Claimed ERTC Credit?

November 29, 2023
Dayes Law Firm

Thanks to a “surge of questionable claims,” the IRS recently put in place a moratorium on processing new Employee Retention Tax Credit (ERTC/ERC) claims through the end of the year. The agency warned that small business owners may be getting scammed by dishonest third-party promoters into submitting improper claims, and that people who do this may have to pay back their ERTC refund, possibly with penalties and interest.

But what if a business owner chooses not to repay an Employee Retention Tax Credit that was improperly claimed? That could lead to real trouble for anyone who attempts such a move. 

Penalties for Failing to Repay an ERTC That Was Improperly Claimed 

If a business owner is audited by the IRS on their Employee Retention Tax Credit claim and the amount of the ERTC is ultimately reduced, the penalties could vary from a 20-percent “accuracy-related penalty” to a 75-percent penalty if the IRS claims civil fraud by the employer, Bloomberg Tax reported.

“In an egregious case, the IRS could assert criminal fraud, resulting in penalties and potential imprisonment,” the tax outlet warned.

Those penalties and fees could really add up, considering businesses may be able to seek a refund of up to $26,000 per employee for the ERTC eligibility period in 2020 and 2021. Paying that back, plus fees and interest, for just one employee would be bad enough. But for several? That’s a financial blow that some businesses may not be able to weather. 

So, what would happen if a business that improperly claimed the ERTC just didn’t pay it back? According to The Tax Adviser, “for each month (or portion of a month) that it is unpaid,” the penalty is equal to 0.5 percent of the tax, not to exceed 25 percent. 

A business owner could potentially go quite a while without paying the money back, but the funds would still add up, and the IRS isn’t exactly going to give up on seeking the money the agency is owed. Plus, the risk of potential criminal charges should be enough to deter an employer who made an improper ERTC claim from going that route. 

Thankfully, there is some recourse if you claimed the ERTC but are not eligible to receive the funds. You can request to withdraw your claim, and ERTC claims that are withdrawn will be treated like they weren’t filed in the first place when it comes to potential fees. The IRS won’t impose penalties or interest, although the agency could possibly still investigate if your claim is proven to be fraudulent. 

Dayes Law Firm ERTC Assistance 

Here at Dayes Law Firm, we have helped many businesses claim the Employee Retention Tax Credit. Our team of tax professionals has assisted businesses in filing for over $250 million in tax credit claims and our clients have already received over $25 million in ERTC funds.

If you work with us to apply for the ERTC, we will make sure your business is eligible to do so, and make sure all of the information sent to the IRS on your behalf is accurate and meets all ERTC requirements. And if you do find yourself audited by the agency, we can help with that, too. 

Our firm will defend the businesses we work with regarding an ERTC audit or if there is ever a request for an audit in the future. Our tax professionals and the partners we work with are skilled in handling application-related complications, and you’ll be in very good hands with Dayes Law Firm.

For a free, no-obligation consultation, please contact us today by calling (800) 503-2000 to learn more!