What Happens If You Wrongly Calculate Your ERTC Eligibility?

October 11, 2023
Dayes Law Firm

The Employee Retention Tax Credit could ease the financial burden the pandemic placed on your business — if you’re eligible. Properly calculating the credit you’re eligible for is critical. Unfortunately, misinformation and scams are flooding the media, causing business owners to miscalculate their credits.

What happens if you wrongly calculate the ERTC? Here are some of the potential consequences. 

What Is the ERTC? 

If you’re unfamiliar, the Employee Retention Tax Credit (ERTC) is a refundable payroll tax credit for businesses that experienced a significant decline in gross receipts in 2020 and/or 2021 due to COVID-19-related governmental orders. A “significant decline” would be a decrease of 50% or 20% in 2020 or 2021, respectively, compared to the same quarters in 2019. 

You can claim up to 50% of qualifying wages paid to employees during these periods, but the definition of qualifying wages may vary depending on the size of your business. Consult ERTC tax attorneys to learn more about your eligibility. 

Penalties for Wrongly Calculating the ERTC

When claiming the ERTC, you must accurately calculate the qualifying wages for employees who worked in your business in 2020 and/or 2021. Miscalculating these wages or claiming the ERTC when you aren’t eligible could result in an IRS penalty. 

The IRS has an “erroneous claim for refund or credit” penalty equal to 20 percent of the excessive amount you claimed. For example, if you unknowingly claimed an extra $1,000 beyond your qualifying wages, you would face a $200 tax penalty. 

The IRS charges interest on penalties, and interest continues to increase until you pay your balance in full. You can request the IRS to remove or reduce a penalty if you can show that you acted in good faith and had reasonable cause to claim the additional wages. 

In rare cases, incorrectly calculating the ERTC could lead to a tax fraud charge. While the IRS mainly punishes tax fraud with civil penalties, like the fine above, some egregious cases of overcalculations could lead to criminal charges. Tax fraud can result in up to five years in prison and up to $100,000 in fines. 

On September 14, the IRS announced “an immediate moratorium through at least the end of the year on processing new claims for the pandemic-era relief program” as a result of increased fraud concerns. 

IRS Commissioner Danny Werfel noted in the announcement, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in…businesses should seek out a trusted tax professional who actually understands the complex ERC rules.”

If you work with a tax professional on your Employee Retention Tax Credit application, you may be less likely to turn in an incorrect claim to the credit.

Tips To Avoid False ERC Claims

Ensuring you qualify for the ERC and calculating the credit correctly can help you avoid penalties from the IRS. Review the following tips to file an accurate ERC claim: 

Do Your Research

Thoroughly research the ERTC before claiming it. Ensure your business qualifies and read any updates from the IRS about the credit. 

Additionally, be sure to research any tax advisors or agencies before working with them. A tax advisor should have a proven track record, an overwhelmingly positive reputation, and the right credentials to offer tax assistance. 

Be Wary of Scams

Unfortunately, ERTC scams are rampant across the U.S. “ERTC mills” are third-party agencies that pledge huge refunds for filing the ERTC and often share misinformation about the credit. For example, a popular scam email indicates that any business can qualify for the ERTC if they had at least three employees during 2020 and 2021. This is a false claim. 

If an outside party has contacted you directly about the ERTC, you can assume it’s a scam. 

Work With Trusted ERTC Tax Attorneys

Risking expensive tax penalties or even criminal charges isn’t worth it. Instead, work with knowledgeable tax attorneys to ensure your ERTC claim is accurate and sound.

You won’t need to worry about miscalculating the ERTC when working with Dayes Law Firm. Contact us today at 866-567-4510 for a free consultation.