As a business owner, it is easy to get excited about the potential financial relief the ERC can offer you. It is understandable that you want to get your application in quickly, as to receive your refund as soon as possible. However, the application should be approached with caution and vigilance, as it is of the utmost importance for your ERC application to be completely accurate. Even a simple, innocent mistake can easily be seen as purposeful fraud when your application is reviewed by the IRS. An inaccurate ERC application is very likely to result in your business being audited and potentially facing substantial fines.
How Are False Claims Determined for ERC?
There are two main reasons why the IRS may determine your ERC claim to be fraudulent. Most commonly, a claim is determined to be false because the business did not, in fact, qualify for the ERC in the first place. In order to be eligible to receive the ERC, a business must pass one of two tests. The first being the gross receipts test, under which a business's gross receipts for a quarter must have fallen below a certain threshold when compared to the same quarter in 2019. The second test is the suspension test, where a business must prove that they were subject to a governmental order, and that the order had a nominal impact on the operations of their business. Submitting an application when your business does not pass one of these tests is considered fraud. The IRS will almost certainly realize this and audit your business.
The second reason an ERC claim may be considered false is due to the amount you are trying to claim. The amount any business receives from the ERC is directly tied to the amount of qualified wages paid to employees. Generally speaking, qualified wages are any taxable wages paid during the quarters for which the ERC can be claimed. By overstating the amount of qualified wages paid, a business can receive a larger refund than they are actually entitled to. However, this will be easily noticed by the IRS, the claim will be considered false, and the offending business will be audited.
What Happens When the IRS Audits Your Business
An audit from the IRS is something that any responsible business owner tries their utmost to avoid, but it is important to be aware of the process in the unfortunate event that it does happen to you. You will always be notified in advance that an audit is going to be taking place. This is always initially done in the form of an official letter from the IRS. Not long after receiving this letter, you will receive a phone call from the IRS. During this phone call, you will be informed of the pertinent details regarding your audit, and the IRS will likely schedule a time and place to meet with you for an interview. This interview could take place at your home, business, an IRS office, or even over the phone.
To prepare for your appointment with the IRS, you should gather any and all documentation related to the audit. For an ERC audit, this would include your proof of passing one of the eligibility tests and any records showing the amount of qualified wages you paid. The auditor will go over these documents and ask you questions related to the audit. All you can do here is be as truthful as possible and hope that no mistakes were made.
If the audit results in the IRS determining that you have made a false claim, you will face consequences. Most likely you will just have to pay a penalty fee. This will be relatively low if it is believed your false claim was an innocent mistake, and quite high if the IRS believes your claim was a legitimate fraud committed knowingly. The IRS is even within their rights to charge you with criminal tax fraud, a crime punishable by prison time and up to a $100,000 fine for individuals and a $500,000 fine for corporations.
What Does an IRS Audit Letter Look Like?
Sadly, there are a number of scams out there related to the ERC. One of these takes the form of someone pretending to be the IRS in order to steal funds from a business. To avoid this type of scam, it is important to know what official correspondence from the IRS actually looks like. A letter from the IRS will always come in an envelope marked “official business” and bearing the IRS logo. The actual letter will contain a list of the items being audited, the audit period, and a list of documents that you need to provide for the audit. If you have any doubts regarding the legitimacy of an audit letter, contact the IRS immediately.
How Far Back Can the IRS Audit?
Generally, the IRS has 3 years from the date they were filed to audit tax returns. However, for the last 2 quarters of 2021, this statute of limitations was increased to 5 years. It is likely that the statute of limitations will be increased for other quarters eligible for the ERC. The IRS has already put a moratorium on processing new claims, leading many pros to believe further measures will be taken to help them find fraudulent claims.
Should Your Business Be Concerned About a False Claim?
How concerned you should be regarding a false claim depends on the process you used in submitting your ERC claim. If you did it yourself, there may be reason for some concern as it is easy to make a mistake when taxes are not your area of expertise. If you used a lesser service, like an ERC pop-up shop, then there is also reason for concern, as they are not known for taking care with ERC applications. If you engaged the services of a reputable ERC firm or tax professional, then there is likely nothing for you to be worried about.