The Internal Revenue Service (IRS) recently announced it is entering the "next stage" of Employee Retention Credit (ERC) enforcement after uncovering a significant number of improper claims. In a June 20, 2024, news release, the IRS disclosed that the "vast majority" of ERC claims show signs of being improper, prompting a robust response. This includes pursuing civil and criminal penalties as warranted.

What is the Employee Retention Credit (ERC)?

The ERC was introduced under the CARES Act as a refundable tax credit to encourage businesses to retain employees during the COVID-19 pandemic. It has provided vital financial relief to numerous businesses struggling to keep their workforce employed amidst economic uncertainty. However, with the large influx of applications and the substantial amounts of money involved, the ERC has also become a target for fraudulent claims.

The Surge in Seemingly Improper Claims

As defense lawyers, we understand that many ERC claims labeled as improper may not be fraudulent at all. The IRS has identified a staggering number of "seemingly" improper claims, which has prompted the agency to intensify its enforcement actions. These claims often include:

• Inflated Employee Numbers: Businesses unintentionally overstating the number of employees due to confusing guidelines.
• Falsified Payroll Records: Errors in payroll documentation, sometimes caused by third-party advice.
• Misrepresentation of Business Operations: Honest mistakes in interpreting eligibility criteria, leading to incorrect claims.

Understanding the distinction between intentional fraud and unintentional errors is crucial in defending against these allegations.

Next Stage of Enforcement

As part of the next stage of enforcement, the IRS is taking several critical steps to crack down on ERC fraud:

1. Increased Audits and Investigations: The IRS will significantly ramp up the number of audits and investigations targeting ERC claims. This increased scrutiny aims to identify and address improper claims more effectively.
2. Advanced Data Analytics: The agency is employing advanced data analytics to detect patterns and anomalies in ERC claims. This technology allows the IRS to identify potential fraud more quickly and accurately.
3. Enhanced Penalties: Businesses and individuals found guilty of submitting fraudulent ERC claims will face enhanced penalties, including substantial fines and potential imprisonment. The IRS is making it clear that fraudulent behavior will not be tolerated.
4. Collaboration with Other Agencies: The IRS collaborates with other federal agencies to share information and resources. This joint effort enhances the overall effectiveness of identifying and prosecuting ERC fraud.

Why So Many ERC Claims Seem Fraudulent

We recognize that many fraudulent ERC claims may not have been intentional. The ERC claim system was introduced rapidly during the COVID-19 pandemic, creating a chaotic environment for businesses struggling to stay afloat. Constant changes in regulations, ambiguous guidelines, and the urgent need for financial relief led to confusion and errors in claims.

Challenges Faced by Businesses

• Frequent Regulatory Changes: The ERC guidelines were frequently updated, making it difficult for businesses to keep up and ensure compliance. This led to unintentional errors in many claims.
• Ambiguous Guidelines: The complexity and sometimes vague nature of the ERC rules created confusion. Businesses often had to interpret unclear guidelines, which increased the likelihood of mistakes.
• Urgent Need for Relief: Businesses were pressured to secure financial assistance quickly to survive the pandemic. In the rush, some may have made inadvertent errors in their claims.
• Third-Party Exploitation: Many third-party companies emerged, claiming to help businesses with ERC claims. Some of these entities took advantage of the confusion, leading business owners to submit incorrect claims based on faulty advice.
• Documentation Issues: Maintaining accurate and comprehensive documentation was challenging amidst the turmoil of the pandemic. Incomplete or poorly organized records have contributed to claims appearing fraudulent.

Unintentional Errors vs. Fraud

While the IRS's rigorous enforcement aims to root out intentional fraud, it's essential to differentiate between deliberate deception and unintentional mistakes. Many businesses acted in good faith, trying to navigate an unprecedented and rapidly changing situation.

Penalties for Being Convicted of ERC Fraud

Being convicted of Employee Retention Credit (ERC) fraud can result in severe penalties. Here's what you could face:

• Prison Sentences: Depending on the severity and extent of the fraud, convictions can lead to significant prison sentences.
• Heavy Fines: The fines can be substantial, often amounting to several times the value of the fraudulently obtained credits.
• Repayment of Funds: Convicted parties must repay the full amount of ERC funds received through fraudulent claims.
• Restitution: Courts may order restitution to cover the losses incurred by the government.
• Civil Penalties: Beyond criminal fines, there may be additional civil penalties.
• Reputational Damage: A conviction can severely damage personal and professional reputations, impacting future business and employment opportunities.

What To Do If You're Under ERC Fraud Investigation

Facing an employee retention credit fraud criminal investigation can be daunting, but taking the right steps can significantly impact the outcome. Here's what you should do:

Consult an ERC Fraud Defense Lawyer

Engage an experienced employee retention credit fraud defense lawyer immediately. Legal experience is crucial for navigating the complexities of the investigation and protecting your rights.

Gather Documentation

Collect all relevant records, including payroll data, financial statements, and correspondence related to your ERC claims. Organized documentation will be essential in your defense.

Avoid Altering or Destroying Evidence

Do not alter or destroy any documents. This can lead to additional charges and worsen your situation.

Limit Communication

Do not discuss the investigation with anyone other than your lawyer. Miscommunications or offhand comments can be detrimental.

Cooperate with Your ERC Fraud Defense Lawyer

Follow your lawyer's advice closely, and provide them with all the necessary information to build a robust defense.

Stay Informed

Keep abreast of the investigation's progress and understand your rights at every stage. Knowledge is power in navigating legal challenges.

How an ERC Fraud Defense Lawyer Can Help

Facing an ERC fraud investigation can be overwhelming, but we are here to provide the experience and support you need. Here's how we can assist you:

Experience in ERC Regulations

Our team is well-versed in the complex ERC guidelines and can help you understand your case's specific requirements and compliance issues.

Comprehensive Document Review

We meticulously review all documents and records related to your ERC claims, identifying any potential issues or discrepancies that may arise during the audit.

Strategic Defense Planning

We develop a tailored defense strategy that addresses the specific allegations against you, leveraging our knowledge and experience to protect your rights and interests.

Representation During IRS Interactions

We represent you in all communications and meetings with the IRS, ensuring that your case is presented accurately and professionally, minimizing the risk of miscommunication or misinterpretation.

Negotiating Settlements

Sometimes, negotiating a settlement with the IRS can be in your best interest. We have extensive experience negotiating favorable settlements that can reduce penalties and avoid more severe consequences.

Legal Advocacy

If your case proceeds to litigation, we provide vigorous legal advocacy on your behalf. Our team is experienced in defending clients in federal court and will fight to protect your rights and achieve a favorable resolution.

Contact Us for Legal Support

If you are facing an ERC fraud investigation or audit, don't navigate it alone. Contact Candice Fields Law, PC today for legal guidance and representation. We are here to protect your rights and help you achieve the best possible outcome. Reach out to us now to discuss your case and explore your options.