Companies That Improperly Claimed the Employee Retention Credit Can Face Steep Penalties in IRS Audits and Investigations

As part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Congress established a new refundable tax credit for qualifying companies that kept their employees on staff in 2020. Congress extended this credit for 2021 through the Taxpayer Certainty and Disaster Tax Relief Act, albeit with revised eligibility criteria.

With various estimates putting the cost of COVID-19 relief fraud in the tens of billions of dollars, the Internal Revenue Service (IRS) and other federal authorities are now cracking down on companies (and individuals) suspected of improperly claiming credits, loan forgiveness and other pandemic-related benefits. Companies in Maryland that improperly claimed the employee retention credit for 2020 or 2021 are at risk of facing audits and investigations, and these inquiries have the potential to lead to civil or criminal penalties.

What Companies that Claimed the Employee Retention Credit Should Do to Protect Themselves

Given the risks of facing IRS scrutiny for improperly claiming the employee retention credit, companies that claimed the credit for 2020 or 2021 should take steps to protect themselves. Some examples of these steps include:

1. Reevaluate Eligibility for Each Calendar Quarter

For both 2020 and 2021, companies were required to assess their eligibility on a quarterly basis. Companies should consider reevaluating their eligibility for each calendar quarter, keeping in mind that the eligibility criteria for the employee retention credit changed over time.

2. Ensure Accurate Calculation of Qualified Wages

The definition of “qualified wages” that were eligible for reimbursement through the employee retention credit changed over time as well. In addition to reevaluating their eligibility (based on the number of employees and pandemic-related business interruptions or revenue loss), companies should ensure that they accurately calculate “qualified wages” for all relevant calendar quarters as well.

3. Ensure the Business Did Not Claim Credits in Excess of the Statutory Maximums

The CARES Act and Taxpayer Certainty and Disaster Tax Relief Act capped the “qualified wages” that qualified for the employee retention credit for each calendar quarter. Companies that exceeded that statutory cap in any calendar quarter risk facing liability for back taxes, interest and penalties.

4. Assemble Documentation of Eligibility

Companies that complied with all pertinent requirements should collect the documentation that substantiates their eligibility. In the event of an IRS audit or investigation, having this documentation on hand will help streamline the process of securing a favorable resolution.

5. Take Appropriate Remedial Action As Necessary

For companies that have improperly claimed the employee retention credit, taking appropriate remedial action can both mitigate the financial consequences and minimize the risks of facing IRS scrutiny. Depending on the circumstances at hand, a company’s options may range from filing an amended return to making an offer in compromise or submitting a voluntary disclosure.

Schedule a Confidential Consultation with US International Tax Advisors

If you have questions or concerns about the IRS’ employee retention credit, US International Tax Advisors can help you make informed decisions. To speak with US International Tax Advisors in confidence, please call 844-796-8565 or request an appointment online today.