Yes, You Can Still Face Prosecution for ERC Fraud in 2023

The Employee Retention Credit (ERC) was—and is—a pandemic relief program that allows qualifying businesses to claim refundable tax credits for the 2020 and 2021 tax years. Qualifying businesses can retroactively claim the ERC through 2025, and they can receive refunds from the Internal Revenue Service (IRS) if they paid more than necessary during the COVID-19 pandemic.

Businesses that have claimed the ERC (and that claim the ERC in the future) can also expect to face scrutiny from the IRS if their returns raise red flags. Like the Paycheck Protection Program (PPP) and other pandemic relief programs, the ERC proved to be a prime target for fraud, and the IRS is focusing its efforts on uncovering and prosecuting pandemic-related fraud in 2023.

Employee Retention Credit (ERC) Fraud: Are You (and Your Business) At Risk?

Fundamentally, ERC fraud involves claiming a credit for which a business is ineligible. The ERC is subject to strict eligibility criteria—criteria which changed from 2020 to 2021. If a business filed for the ERC when it was ineligible to do so or if it inflated the amount of the credit it was entitled to receive, the business (and potentially the business’s owners) can face liability for ERC fraud.

Depending on the circumstances, this liability could be either civil or criminal in nature. The IRS is working with the U.S. Department of Justice (DOJ) to pursue criminal charges in cases involving apparent intentional ERC fraud, while businesses that inadvertently claimed credits for which they were ineligible can face liability for back taxes (including repayment of refunds), interest and civil monetary penalties.

Some examples of potential allegations in ERC fraud cases include:

• Claiming the ERC for the 2020 tax year without either (i) a full or partial suspension of operations due to a government mandate or (ii) a significant decline in gross receipts during 2020.
• Claiming the ERC for the 2021 tax year without either (i) a full or partial suspension of operations due to a government mandate, (ii) a decline in gross receipts during the first three quarters of 2021, or (ii) qualifying as a recovery startup business during the third or fourth quarter of 2021.
• Relying on a third party to assess the business’s ERC eligibility and file for a refund on the business’s behalf. The IRS has identified a high volume of fraud in this scenario and is continuing to warn business owners to be wary of aggressive ERC marketing scams.

Business owners who have concerns about their ERC filings should work to resolve the issue before it leads to IRS scrutiny, and those who are already facing scrutiny should engage experienced legal counsel promptly. Regardless of the circumstances at hand, a proactive approach can help to significantly reduce the risk of facing unnecessary civil or criminal liability.

Speak with an Experienced Federal Tax Attorney in Confidence

If you need to know more about how to avoid unnecessary liability for ERC fraud, we encourage you to contact us promptly. Call 703-752-3752 or contact us confidentially online to request an appointment with federal tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, in Virginia today.