Consequences of ERC Fraud

Allegations of ERC Fraud Can Lead to Substantial Penalties for Businesses and Their Owners

The Internal Revenue Service (IRS) and U.S. Department of Justice (DOJ) are targeting businesses and business owners suspected of employee retention credit (ERC) fraud. While IRS audits can lead to liability for civil penalties, criminal ERC fraud investigations can lead to additional fines and prison time.

If your business is facing an audit or investigation, or if you have concerns about facing scrutiny for ERC fraud, it is important to understand what is at stake. Here is an overview of the potential consequences of facing ERC fraud allegations.

Civil Penalties for ERC Fraud

IRS audits targeting ERC fraud can lead to civil penalties. If your business unintentionally claimed a credit for which it was ineligible—or if your business was eligible but erroneously calculated the ERC—criminal penalties should be off of the table. But your business is still liable for the taxes it owes. When taxpayers fall behind on their federal tax obligations, they are also subject to interest and penalties:

  • Back Taxes – Your business will be liable for the taxes it owes as a result of improperly claiming the employee retention credit. Since the ERC was a refundable credit, this may mean returning the refund.
  • Interest – Unpaid federal taxes begin to accrue interest immediately. The current IRS interest rate for businesses is seven percent in most cases, although the interest rate for “large corporate underpayments” (in excess of $100,000) is currently nine percent of the unpaid tax owed.
  • Civil Penalties – Civil penalties also begin to accrue immediately when taxpayers pay less than the full amount they owe. Penalty amounts vary depending on the specific violation involved. The IRS’ Accuracy-Related Penalty (which applies “if you don’t report all your income or you claim deductions or credits for which you don’t qualify”) is currently 20 percent of the underpaid amount.

Criminal Penalties for ERC Fraud

While civil penalties apply in cases involving unintentional ERC fraud, business owners who willfully claimed the credit despite being ineligible can face serious criminal charges. This includes charges for criminal tax evasion under 26 U.S.C. Section 7201. Under this provision of the Internal Revenue Code, willfully attempting to evade or defeat tax “in any manner” can result in:

  • Criminal Fines – Criminal tax evasion carries a fine of $100,000 for individuals and $500,000 for corporations.
  • Federal Imprisonment – Individuals who are convicted of criminal tax evasion can also face up to five years of federal prison time.

In many cases, federal prosecutors will pursue charges for mail fraud, wire fraud and a variety of other federal crimes as well. Many of these crimes carry six or seven-figure fines and years or decades of federal imprisonment.

Speak with a Washington DC Tax Lawyer at Thorn Law Group as Soon as Possible

If you need defense counsel for an ERC fraud audit or investigation, we encourage you to contact a Washington DC tax lawyer promptly for more information. To speak Kevin E. Thorn, Managing Partner of Thorn Law Group as soon as possible, call 202-349-4033 or request a confidential consultation online now.

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