Employee Retention Credit: The Latest on the $2 Trillion+ COVID-19 Fraud Employers May Not Realize They Have Participated in

Published: Mar 8, 2023
Topics: Tax
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Tax Controversy & Dispute Resolution Spotlight

The Employee Retention Credit^[1] (ERC) allowed eligible employers to claim a refundable tax credit against a percentage of the employer share of Social Security tax.^[2] Unlike the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) programs, whose applications could be filled out by the business owner relatively easily, the ERC was extremely complex. Not only were the rules finicky, fluid, and at one point retroactive, it had to be claimed on Form 941, Employer's Quarterly Federal Tax Return^[3] with a complex calculation not evident on the face of the return.

The fact that the typical business owner could not easily decipher the rules nor easily review the return calculation led to mass fraud by unscrupulous ERC preparation companies charging large upfront or contingent fees based on improper positions related to an employer’s eligibility for and computation of the credit. Nor did they advise the business owner the effects it has on the business income tax return deductions.^[4] The United States Department of Justice^[5] and the IRS Criminal Investigation Unit have been focusing on ERC fraud with the funding from the Inflation Reduction Act.^[6]

Improperly taken or calculated ERC credits can result in:

Failure to deposit penalties and interest on the return
Accuracy-related penalties ranging from 20% to 40% of the underpaid tax
Civil fraud penalty of 75% of the underpayment
Criminal fraud penalties
Refunds/overpayments from business owner’s related accounts seized through the Treasury Offset Program

If a business owner believes the ERC credit was claimed or calculated improperly there are ways to correct it:

File Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, to correct the calculation or remove the ERC entirely and return the funds to the IRS. If the ERC refund was not deposited yet, void the check and return to the IRS.
File amended business tax returns to reduce its income tax deduction for the ERC qualified wages^[7] and return the funds to the IRS.
Request First Time Abatement to mitigate certain failure to deposit penalties, if eligible.
Request Reasonable Cause penalty relief.

Lastly, to further emphasize how serious this issue is, Congress has extended the statute of limitations on assessment related to ERC adjustments, from the usual three years to five years.^[8] If you need help determining your eligibility for the ERC you should reach out to a qualified tax professional.

[1] Enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. No. 116-136 (2020),

[2] See Employee Retention Credit - 2020 vs 2021 Comparison Chart | Internal Revenue Service (irs.gov) for details.

[3] Or Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund

[4] IRS issues renewed warning on Employee Retention Credit claims; false claims generate compliance risk for people and businesses claiming credit improperly | Internal Revenue Service

[5] Justice News | DOJ | Department of Justice

[6] Pub. L. No. 117-169

[7] And subsequently the returns of the recipients of any flow-through businesses.

[8] American Rescue Plan Act of 2021, Pub. L. No. 117-2

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