IRS: Businesses that Claim the ERC Credit Are Under the Microscope

The Internal Revenue Service (IRS) recently announced that it is continuing to target businesses that have claimed the Employee Retention Credit (ERC). The ERC was a limited-time credit offered to qualifying businesses under the CARES Act for the 2020 and 2021 tax years. According to an IRS News Release, the agency has identified widespread fraud related to the ERC, and, as a result, it is “actively auditing and conducting criminal investigations related to these false claims.”

What Business Owners Need to Know About the ERC in 2023

With this in mind, business owners who have claimed the Employee Retention Credit should review their records to ensure that they qualify. IRS audits can lead to substantial costs and liability, while tax fraud investigations can lead to criminal fines and prison time. Business owners who have improperly claimed the ERC should correct these errors promptly. While this may result in liability for back taxes, interest, and penalties, the consequences of facing an IRS audit or criminal investigation are far more severe.

What Businesses Were Eligible to Claim the ERC?

Was your business eligible to claim the ERC for the 2020 or 2021 tax year? In order to qualify for the credit, businesses must have either:

• Closed or partially suspended their operations due to a government mandate during the COVID-19 pandemic;
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021; or,
• Qualified as a recovery startup business during the third or fourth quarter of 2021.

To qualify as a “recovery startup business,” a company must have commenced operations after February 15, 2020, and its average annual gross receipts cannot exceed $1,000,000.

What if Your Business Improperly Claimed the ERC?

Businesses that have improperly claimed the ERC have a few potential options. As the IRS notes in its News Release, one option may be to file an amended return. However, as filing an amended return can trigger IRS scrutiny—and as filing an amended return does not necessarily insulate taxpayers from prosecution for past mistakes—this option can be risky in some circumstances. As a result, rather than filing an amended return, some businesses may benefit from submitting a voluntary disclosure.

Regardless of the option that makes the most sense, businesses that have improperly claimed the ERC need to act fast. Once the IRS initiates an audit or investigation, the opportunity to voluntarily correct a past filing mistake goes away. With the IRS prioritizing ERC enforcement in 2023, businesses that have improperly claimed the credit can expect to face steep penalties, and if an audit or investigation uncovers evidence of intentional fraud, business owners can expect to face criminal prosecution as well.

Request a Confidential Consultation with Tax Attorney Kevin E. Thorn in Washington D.C.

If you have questions or concerns about claiming the Employee Retention Credit, we encourage you to contact us promptly. To request a confidential consultation with tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group in Washington D.C., please call 202-349-4033, email ket@thornlawgroup.com or inquire online today.