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Caution: Risks of Improper Employee Retention Credit Claims Can Impact Compliance for Individuals and Businesses

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The Employee Retention Credit (ERC) was introduced in 2020 as part of the CARES Act to help employers retain employees during the COVID-19 pandemic. The credit provides tax relief to eligible employers by allowing them to claim a refundable tax credit on qualified wages paid to employees. However, improper ERC claims can lead to serious compliance issues and penalties for both businesses and individuals.

As we approach the April 15, 2024 deadline for ERC refund requests relating to 2020 wages, it’s important for taxpayers to exercise caution when claiming the credit. The IRS has already identified billions of dollars in potentially fraudulent ERC refund requests. Aggressive and incorrect claims can trigger IRS audits, which are time-consuming and stressful even when you’ve done nothing wrong.

Here are some key risks to keep in mind:

  • Claiming the ERC when not eligible – The eligibility rules are complex.  Claiming the credit without meeting all requirements is considered improper and can lead to repayment demands, additional taxes, penalties, and interest.
  • Inflating employee wages – The ERC is based on qualified wages paid. Any inflation of reported wages to maximize the credit is fraudulent.
  • Claiming non-existent employees – Some tax preparers have claimed credits for fake employees. Listing fake employees on 941 tax forms is illegal and unethical.
  • Understating revenue – One path to eligibility hinges on experiencing a sufficient decline in gross receipts. Underreporting revenue is wrong and can invalidate the entire ERC claim.
  • Not retaining documentation – Employers claiming the ERC must retain records proving eligibility and supporting credit amounts. Insufficient documentation can delay refunds and lead to denied claims.
  • The risks are real, as the DOJ has already prosecuted individuals engaged in fraudulent ERC schemes. However, by exercising reasonable care and working with an experienced tax professional, businesses can ethically benefit from this valuable program while avoiding unnecessary compliance headaches.

With the  April 15 ,2024 deadline approaching, now is the time for employers to review ERC claims and documentation. A prudent risk assessment and focus on accuracy can help protect companies and taxpayer-owners from the hazards of improper ERC claims down the road.