The Internal Revenue Service (IRS) has made it clear that it is coming after anyone that took advantage of the Employee Retention Credit (ERC) during and after the COVID-19 pandemic. Although their goal is noble — to make sure tax cheats are not bilking the system — the reality is far more complex for two reasons:
- Misrepresentation. Unscrupulous third parties reached out to small business owners and encouraged they use this credit, often not fully explaining requirements and misleading the taxpayer. As a result, business owners may have thought they were in the right to take the credit when they did not qualify.
- Confusion. Even the simplest of tax laws is far from easy to understand. This is complex stuff and even the savviest business owners can find themselves struggling to understand what exactly the IRS is asking for when trying to see if their business qualifies for various credits and deductions. The ERC is no different.
Unfortunately, even though the IRS is well aware of these issues, the agency continues to aggressively pursue potential violations.
How aggressive is the IRS in its pursuit to find ERC violations?
The agency recently released a notice stating that its current review finds tens of thousands of business owners wrongly filed for the ERC. This will translate to a loss for business owners of billions of dollars in tax benefits — and this is just the beginning. In the notice, the agency goes on to explain the tens of thousands noted above are just the most obvious offenders. It believes that an additional 60% to 70% are likely in violation. As such, there is a very high risk of audits for anyone that claimed the ERC on their tax returns.
The IRS has also pursued criminal action in these cases. Thus far, it has initiated 450 criminal cases. The IRS has already pushed a dozen of these through to sentencing, sending small business owners to prison for an average sentence of 25 months.
What can small business owners do to protect themselves?
It is wise for small business owners to seek experienced legal counsel. This is true whether looking to claim the ERC and reap the rewards of this important tax benefit or if concerned that your filing may be under scrutiny. The attorneys at Goldburd McCone have experience in both situations and can provide guidance, working to better ensure your rights are protected throughout the process.