ERTC Experts

IRS Warns Employers of Falsely Claiming ERTCs

The Internal Revenue Service (IRS) has issued a warning to employers of the consequences for mistakenly claiming Employee Retention Credit (ERTC) or erroneously reporting to employees as laid off instead of furloughed.

Congress authorized the credits as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 in order to assist employers in covering payroll costs during the pandemic. The credits are offered on a quarterly basis with earnings up to $5,000 per employee, however in order for employers to be fully eligible they must meet certain qualifications.

The IRS has reported that many employers who have mistakenly claimed ERTCs have been penalized with fines and back taxes due. To avoid such an issue, any business that is considering applying for an ERTC should:

  • Ensure that their payroll records are accurate and that their employees were affected or laid off due to COVID-19 before claiming a credit.
  • Understand the impact of incorrectly labeling an employee as laid off, which could result in delaying any unemployment benefits they could pursue.

For more information on how to properly utilize this credit program and what penalties may apply for false claims visit IRS.gov/, or contact your local IRS representative for assistance.

Overview of ERTCs

The Employee Retention Tax Credit (ERTC) is a refundable tax credit available to eligible employers who have suffered a reduction in business operations or gross receipts due to COVID-19. Employers can claim the credit against their federal employment taxes up to certain limits.

The IRS has recently reminded employers to take heed when claiming the credit and to double-check their eligibility and the amount they receive. In this article, we will review the general overview of ERTCs and the warning issued by the IRS.

Eligibility requirements

Employers who wish to take advantage of the Employee Retention Tax Credit (ERTC) must understand their eligibility requirements and how it differs among different types of employers. The ERTC is a refundable tax credit designed to help certain eligible employers cover certain expenses related to keeping employees on their payroll despite business disruptions caused by the Coronavirus pandemic.

Employers are eligible for the credit if they have experienced one of these three scenarios:

  1. Full or partial suspension of business operations due to a governmental order related to coronavirus.
  2. Experienced an overall significant decline in gross receipts for any calendar quarter during 2020 relative to the same calendar quarter during 2019.
  3. Was in business in 2020 and was not in existence from February 15, 2020 – December 31, 2019 (i.e., newly formed businesses).

In addition, the ERTC applies only to employers that had fewer than 500 full-time employees as of December 31, 2019 and that wasn't part of a control group under tax law section 1563(a). Eligible wages paid across all states up until December 31, 2020 are subject to the ERTC; however, wages paid after that period are not eligible for ERTC credits unless they may be recaptured from 2021 credits due to timing differences between contributions made and payroll periods ending before 2021 begins.

Moreover, wages taken into account for calculating employer eligibility should include all payments for vacation pay or other customary fringe benefits with any amount greater than $10,000 per employee excluded from the calculation per year earned during any given period beginning January 1st until December 31st

Furthermore, highly compensated employees (definitions varies by state) may be excluded from qualifying wages used when calculating an employer’s total workforce size if specified conditions are met (check with your state government or State Department of Labor).

Types of ERTCs

Under the CARES Act, an employer that paid qualified wages before January 1, 2021 may be eligible for two types of Employee Retention Credit (ERTC). The two main types of ERTCs are:

  1. The ERTC for employers that had to fully or partially suspend operations due to government orders related to COVID-19. This ERTC is determined on the basis of wages paid up to $10,000 per employee during the period that the business was suspended.
  2. The ERTC for employers with a significant decline in gross receipts. This ERTC is based on a comparison between quarterly gross receipts in 2020 and 2019 and works as follows: if the current-year quarter’s gross receipts are less than 80 percent (or 50 percent for certain large employers) of a comparable prior year quarter’s gross receipts, then the employer qualifies for a credit and can claim at least 50 percent of some or all wages paid up to $10,000 per employee for that quarter.

In both cases, employers have had to comply with certain eligibility requirements in order to qualify for these credits. To ensure compliance with IRS regulations, employers should provide their tax advisors with accurate information about their circumstances when seeking reimbursement under either type of credit. In addition, it is important to note that no employer can claim false or inappropriate ERTCs; according to the IRS Commissioner Charles Rettig: “claiming false [ERTC] credits is an egregious act… Taxpayers should take steps now to correct any errors they have made in claiming these credits.”

IRS Warning

The Internal Revenue Service (IRS) has issued a warning to employers that they should not falsify their claims for the Employee Retention Tax Credits (ERTC). The IRS warns employers that providing false information on their claims or failing to provide accurate information can lead to civil and criminal penalties. Therefore, employers must take the proper steps to accurately calculate and report their ERTCs to ensure compliance with the law.

Misuse of ERTCs

The U.S. Internal Revenue Service (IRS) strongly warns taxpayers against misusing funds designated as Employee Retention Tax Credits (ERTCs). ERTC funds are intended to help businesses and employers keep employees or maintain their businesses during and after the COVID-19 public health emergency. Misappropriation of these funds is subject to criminal penalties, including large fines and/or possible imprisonment.

Any attempt to misuse ERTCs for purposes other than for employee retention or business preservation will be investigated by the IRS and could lead to civil or criminal actions such as strike-off of your business, asset forfeitures, bankruptcy proceedings, suspension of employer taxes, fine and imprisonment. The IRS can also seek monetary penalties equal to 15 times the average credit received per employee over a year period if deemed that the abuse was intentional.

Because of this high risk of civil/criminal action by misuse of ERTCs, employers should take extra care in

  • verifying all eligible employees' personnel data,
  • limiting authorization for ERTC applications only to key personnel with sufficient knowledge about the proper usage requirements for ERTC claims,
  • ensuring that all applications for ERTCs are accurate so as not to invite investigation from the IRS upon filing returns associated with such credits.

Penalties for False Claims

The Internal Revenue Service (IRS) is reminding employers of the penalties for deliberately submitting false information on forms associated with claiming Employee Retention Tax Credits (ERTCs).

According to the IRS it is possible for businesses and other employers, including nonprofits, to be subject to substantial penalties when filing false claims. It is important that all employers abide by the requirements of ERTC and accurately complete all paperwork associated with their claims. Employers should be aware of their responsibility to the federal government, and if any wrong information is reported this could result in fines.

The maximum penalty for knowingly filing a fraudulent claim for ERTCs or making a false statement regarding an employee's eligibility or hours worked, or failure to deposit taxes withheld from employee wages is five years in prison and/or $10,000 criminal fine plus associated civil monetary penalties. In addition, any amount taken due to negligence as part of an individual’s claim may be subject to a penalty of up to 75 percent on top of the tax owed.

Additionally there are secondary penalties in connection with failing to pay workers in a legal matter when using funds claimed through ERTCs which include felony charges such as harboring illegal aliens or evading minimum wage laws. Other potential violations such as breaking labor standards can lead to back pay demands from the Department of Labor as well as civil monetary damages. Employers should take extra caution when filing paperwork connected with any fraud prevention program administered by the IRS in order not receive any unwanted attention from investigators at a later time.

Employer Responsibilities

As the IRS continues to monitor and investigate employer-filed Paycheck Protection Program (PPP) loans, the Internal Revenue Service (IRS) is warning employers to not falsely claim Employee Retention Tax Credits (ERTCs) on their income tax returns.

The ERTC is a refundable tax credit for employers equal to 50% of certain costs such as wages paid to employees after March 27, 2020, and before January 1, 2021. Employers have important obligations they need to be aware of before they claim the ERTC:

Documentation of ERTCs

As an employer, it is your responsibility to provide each employee with accurate and up-to-date documentation of their Employment Rights, Terms and Conditions (ERTCs). ERTCs are the foundation of the employment relationship between the employer and their employees.

Documentation of ERTCs must include key information such as:

  • job title
  • job description
  • hours of work
  • holiday entitlement
  • overtime
  • pay
  • details regarding any bonus or commission that may be due
  • Any disciplinary process
  • employment termination procedures

It is important that this documentation is provided in writing before the employee starts or within two months of commencement, whichever is sooner. Employees should also be kept updated if their terms or conditions change from those originally specified. Employers must also ensure a copy of any documents signed by the employee including acceptance of terms is kept for at least 12 months after termination in case there is an issue relating to rights or benefits further down the line.

Filing of ERTCs

Employers are required to file Employment Retirement Contributions Tax Returns (ERTCs) with the Internal Revenue Service (IRS). It is important to file this return as soon as possible after the close of the tax year or else employers may risk owing penalties and interest on any unpaid taxes. Employers must use Form 941 for this purpose, which can be obtained from the IRS website.

The Form 941 must include information on total employment taxes incurred in that period and any other unpaid amounts, estimated taxes paid in that period, and adjustments made for employee wage reimbursements (such as travel expenses). Employers are responsible for completing all parts of this form accurately and comprehensively in order to avoid incurring costly fines or penalties. Additionally, employers must factor in third party withholding amounts for Social Security and Medicare when filing their return.

When filing Form 941, employers must consider both federal income tax liability and excise liabilities under trust law provisions such as IRC Section 4971 or 4972. This includes payments made to health plans under IRS Section 125(b)(2)(A) that have not been excluded from wages subject to employment taxes by federal law or regulations. Care should also be taken to properly report capital gains incurred through retirement plan transactions such as 401(k) withdrawals or Consolidated Omnibus Budget Reconciliation Act (COBRA) accounts. To comply with filing requirements fully, employers must keep thorough records of qualifying expenditures throughout the tax year as definitive evidence of deductions made in each quarter reported on ERTC submissions.

Conclusion

The IRS and U.S. Treasury remain dedicated to protecting against fraud and abuse of the employee retention tax credit (ERTC). Employers are reminded to avoid the penalty of falsely claiming ERTCs and instead adequately document that they have both qualified wages and appropriate credit conditions present in order to properly claim the ERTCs.

For more information regarding ERTCs and how to determine if you are eligible, please check out the IRS website or consult with your trusted accounting or legal advisor. Following all applicable rules is key in maintaining an accurate tax filing process and avoiding potential penalties from incorrectly claiming credits.