Understanding the Risks for Maryland Business Owners Targeted in IRS ERC Tax Audits and Investigations

As the Internal Revenue Service (IRS) continues targeting Employee Retention Credit (ERC) fraud in 2024, business owners across Maryland are finding themselves facing audits and investigations. These audits and investigations present serious risks, with many leading to criminal charges. But, even when criminal charges aren’t warranted, business owners can still face substantial liability, and working with an experienced Maryland IRS tax attorney is essential for avoiding unnecessary consequences.

What are the risks involved with facing an IRS ERC tax audit or investigation? US International Tax Advisors explains:

Criminal Penalties for ERC Fraud

The IRS and U.S. Department of Justice (DOJ) can pursue criminal charges in cases involving knowing and willful ERC fraud. Section 7201 of the Internal Revenue Code (IRC) makes it a federal offense to “willfully attempt[] in any manner to evade or defeat any tax imposed by” the IRC. This includes willfully attempting to evade federal employment tax liability through a fraudulent ERC claim. In federal tax evasion prosecutions under Section 7201, potential penalties include:

• Up to a $100,000 fine for individuals ($500,000 for corporations); and,
• Up to five years of federal imprisonment.

Other provisions of the IRC impose criminal penalties as well. For example, Section 7206 of the IRC prohibits willfully filing any return or other document which the filer, “does not believe to be true and correct as to every material matter.” Violations carry the same fines as those imposed by Section 7201 and up to three years of federal incarceration. In criminal ERC fraud cases, the DOJ may pursue charges for wire fraud, conspiracy, and other federal crimes as well—and these crimes also carry substantial fines and prison time.

Civil Penalties for ERC Fraud

IRS ERC tax audits and investigations can lead to the imposition of civil penalties when criminal charges are unwarranted. All non-willful invalid ERC claims carry the potential for civil penalties—which generally include:

• Back Taxes – Businesses and business owners found liable for non-willfully submitting fraudulent ERC claims can be held liable for all back taxes owed. In cases involving ERC refunds, this typically means that the refund will need to be repaid.
• Interest – Under the IRC, back taxes begin to accrue interest immediately. Back taxes currently accrue interest at a rate of eight percent in most cases, though this increases to 10 percent for large corporate underpayments.
• Accuracy-Related Penalty – Along with back taxes and interest, businesses and business owners that improperly claimed the ERC can also be held liable for the IRS' accuracy-related penalty. In most cases, this penalty is calculated as 20 percent of the back taxes owed.

Request a Consultation with US International Tax Advisors

If you need to know more about the risks involved with facing an IRS ERC tax audit or investigation (and what you can do to protect yourself), we encourage you to contact us promptly. To request a consultation with US International Tax Advisors, please call 844-796-8565 or send us a confidential message online today.