15 Sep 23

What is the penalty for false ERC claims?

| by

Last Updated on: 15th September 2023, 05:16 pm

What is the Penalty for False ERC Claims?

The Employee Retention Credit (ERC) threw struggling businesses a lifeline during COVID-19. This refundable payroll tax credit encouraged retaining staff when revenue dropped. But some abused this relief, leading to IRS crackdowns and penalties.

If you’re caught making false ERC claims, what penalties could you face? Let’s review the fines and other consequences.

Paying Back the Credit

First, any ERC money claimed improperly must be paid back to the IRS. You’ll have to return the full credit amount, even if your business genuinely qualified for a smaller legitimate ERC claim.

On top of refunding the credit, the IRS will charge interest on erroneous amounts from the date your return was filed. The interest rate is currently 6% annually for refunds and underpayments.

Failure to Deposit Penalty

The ERC comes in the form of a tax credit against employer payroll taxes. When you reduce your payroll tax deposits based on expected credits, but those credits don’t materialize, you can be hit with a failure to deposit penalty.

This penalty is 2% to 15% of the tax underpayment, depending on how late the missing deposit is.

Accuracy Penalties

If an ERC audit finds you were negligent or disregarded rules, you may face accuracy penalties on the underpaid tax:

  • 20% penalty for negligence or disregard of IRS rules
  • 40% penalty for substantial understatement of tax

Negligence includes any failure to make a reasonable attempt to comply with tax laws. Substantial understatement means understating tax by 10% or more of the correct amount.

Civil Fraud Penalty

In civil tax fraud cases, the IRS imposes a 75% penalty on the credit amount claimed improperly. This applies when they determine you intentionally evaded or misled them.

The IRS must prove civil tax fraud through clear and convincing evidence. This high standard makes civil fraud penalties less common than negligence penalties.

Criminal Fraud Prosecution

Willful tax evasion or fraud can trigger criminal charges, which the IRS pursues through its Criminal Investigation division. Criminal penalties may include:

  • Up to 5 years in prison
  • Fines up to $250,000 for individuals or $500,000 for corporations

Jail time is rare except for extreme cases or repeat offenders. Fines are more common. Either way, criminal prosecution devastates one’s finances, reputation, and mental health.

Banned From Future Tax Relief

Abusing COVID relief programs like the ERC can get your business blacklisted from aid offers for years. For example, the SBA Inspector General can ban offenders from federal contracts.

You may also be prohibited from claiming tax credits like the ERC in the future. This collateral damage could be especially harmful if another pandemic or recession hits.

Seizure of Assets

If you owe ERC penalties and interest you can’t pay, the IRS can seize assets like bank accounts, wages, property, and investments. They may also put a lien on your assets, damaging your credit.

Reputational Harm

Being prosecuted for tax fraud or evasion often makes the news, sinking your reputation. Even civil penalties can hurt your standing with customers and professionals.

Rebuilding trust after an ERC scandal may require stepping down, rebranding, or closing your business entirely.

Attorney Fees

Defending yourself in an ERC audit or criminal case will likely require an experienced tax attorney. Their fees can easily exceed $10,000 if your case is complex or goes to trial.

Any fines, asset seizure, or repaying the credit will be in addition to these legal costs.

Tips for Avoiding ERC Penalties

Now that you know the potentially massive penalties, here are tips to steer clear:

  • Use an experienced CPA or tax pro to claim the credit
  • Thoroughly document your eligibility and credit calculations
  • Claim conservatively if your situation is borderline
  • Watch for shady preparers making big promises
  • If audited, get legal help immediately

Honest mistakes can still happen, but penalties are harshest for intentional fraud. Protect yourself by finding a reputable tax advisor you can trust.

The Future of ERC Penalties

The IRS is still unraveling billions in questionable ERC claims. Expect penalties and prosecutions to ramp up as they dig deeper.

However, they may offer some penalty relief for businesses that self-report errors. Coming clean quickly can show you weren’t trying to intentionally deceive.

The pandemic brought vital relief when businesses desperately needed it. But those who abused programs like the ERC are learning a hard lesson about the steep price of tax fraud.


    1. IRS Orders Immediate Stop to New ERC Processing Amid Questionable Claims