The IRS May Levy a 75% Penalty for ERC Tax Refund Taxpayer Audits--Is it worth the Risk?

The Employee Retention Credit (ERC)

The Employee Retention Credit (ERC) tax refund program provides substantial benefits to those qualified companies, churches, schools, and non-profits, who kept employees working during the epidemic.

This is an especially appealing prospect today, with many businesses, faith-based communities, and non-profits now facing a significant slowdown in revenues and a possible recession in 2023.  

The vast amount of money available through the ERC is complicated and combined with qualification criteria that some consider “open to interpretation.”

This has led to newly formed and unknown, heavily advertised credit mills who erroneously convince unknowing business owners that they qualify for oversized ERC tax refunds.

ERC Fraud

Fraud related to the ERC tax refund program is now estimated to be in excess of a trillion dollars, and the IRS has already hired 300 new examiners to audit suspicious ERC refund claims. Furthermore, the statute of limitations on auditing any ERC claim is now five years from the date of filing for the ERC credit.  

If the mere suggestion of an IRS audit sends shivers down your spine, understand the magnitude of penalties for an improperly filed amended ERC tax refund.

IRS penalties range from 20% of the refund claim amount to 75% of a tax refund deemed to be filed in bad faith. A $1,000,000 improperly documented ERC tax refund could result in an IRS demand for a total of $1,750,000 repayment plus interest. 

Now that I have you reaching for your tax attorney’s number for advice, we should look at the history of the CARES Act and the ERC.

The CARES Act and the ERC

In February 2020, our company began research on the pending COVID assistance legislation. We received copies of the Senate’s daily distribution list of the bill and its evolving language.

We invested hundreds of hours in professional resources reviewing the legislation and the Senate passed the 1100+ page CARES Act by a unanimous vote on March 25, 2020.  

We continued following the subsequent CARES Act evolution, including SBA and IRS FAQs, ongoing IRS guidance and numerous revisions since then, developing a knowledge base that had to be continuously updated. 

Corporate Strategies became one of the first non-bank alternative lenders to originate critically needed PPP and PPP2 loans for our clients, virtually all of whom have subsequently applied for and received ERC tax refunds as well. 

ERC Eligibility

Our first priority is to establish client ERC eligibility and build an audit defense file, documenting each ERC tax refund qualification with exhibits that comply with the IRS Document Guidelines for Substantiation of the ERC.

The IRS has stated if the taxpayer has these qualifying documents in the event of an audit, they will be deemed to have filed a good faith claim, minimizing penalty risk.

ERC Providers

We suggest the following questions be asked of those soliciting your ERC work, as they are key issues beyond how your organization revenues dropped between 2019-2021. 

• How long has your company been in business and what is the experience of your principals with the CARES Act, finance and taxes?  
• What is aggregation and how does it affect our company’s eligibility for the ERC? 
• How do the PPP requirements for FTEs differ from the ERC?  
• I am the majority owner of a family business. Do my family members qualify for the ERC? 
• We are a faith-based community, and some employees are clergy who do not pay into Social Security or Medicare—do they qualify for the ERC? 
• We have a PPP loan outstanding that has not been forgiven—how does this affect our eligibility? 
• Can our ERC tax refund be determined by comparing our quarterly 941 filings from 2019 with 2020 and 2021? 
• We are a school that closed from March 2020 until January 2021—are we eligible for ERC the entire time we were closed? 
• How do we determine our eligibility and refund amount if our operations were partially suspended from March 2020 until year end 2020? 

If the prospective provider cannot answer these questions, including providing the IRS guidance supporting their answer, move on.

Regardless of the service provider you ultimately choose for ERC tax refund qualification, Corporate Strategies Merchant Bankers believes this worthy, one‐of‐a‐kind tax refund program will continue to be a prime target of future audits.

Since Congress recently appropriated $80 billion in expanded budget, the IRS will justify that increased budget with substantial hiring of more auditors to review ERC tax Refund claims for fraudulent or incorrect filings.  

Is it Worth it?

With a well-documented claim of any size or complexity, there is no reason not to apply for the ERC tax refund you are entitled to—but satisfy yourself that whoever you choose for ERC tax refund qualification work fully understands:

• The legislation,
• The IRS guidance and
• How to build an audit ready file. 

Then you can cash that ERC tax refund check with the full confidence and enjoyment that you will get to keep it! 

About

I'm the founder of Corporate Strategies Merchant Bankers LLC. We provide private funding solutions for small to medium-sized businesses (SMB) and non-profits unable to obtain financing or refinancing through conventional banks.

We provide funding for Real Estate, Operational and Turn-around financing, equipment and receivables, and litigation financing.

We also provide eligibility analysis for the ERC tax refund program at no charge.

Contact

Call us now at 713-621-2737 for ERC eligibility information or any of our financial solutions.

Tim Connolly | CEO & Founder

Corporate Strategies Merchant Bankers LLC

123 N. Post Oak Lane Suite 440

Houston, TX 77024

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