The Internal Revenue Service recently issued another warning to taxpayers to be on guard against third parties aggressively promoting the use of the Employee Retention Tax Credit (“ERTC”) enacted in March 2020 as part of the CARES Act response to the COVID-19 pandemic. Despite previous warnings about promoters aggressively misleading people and businesses into thinking they can claim ERTCs — and charging large upfront fees or fees contingent on the amount of refunds generated — the IRS has noted that there have and continue to be improper attempts to claim the credits. The sheer number of ERTC claims submitted – combined with the Service’s concerns about fraud — has caused severe delays in processing these claims and are now under increasing scrutiny.
With this additional IRS scrutiny, it should come as no surprise that taxpayers with ERTC claims — whether valid or not – are increasingly finding themselves the target of IRS audits. Failure to properly establish entitlement to the claimed credits can result additions to tax, as well as penalties and interest, and the Service has been clear that it considers the taxpayers claiming the credits responsible for the information reported on returns, even if the returns were prepared by promoters or other third-party preparers.
In addition to auditing ERTC claims, the IRS has also warned taxpayers that Paycheck Protection Program (“PPP”) loans are being reviewed. While PPP audits have generally been under the purview of the Small Business Administration (“SBA”), the IRS has reminded taxpayers that PPP loan forgiveness based upon misrepresentations or omissions will be included in taxable income.
Audits of ERTCs or forgiven PPP loans can result in additional taxes, penalties, and interest for taxpayers who cannot validate their claims. Moreover, the IRS has made no secret of its concerns about taxpayers’ – and their advisors’ — fraudulent applications for both ERTCs and PPP loans, and is on the lookout for cases to refer for criminal prosecution. Taxpayers being audited with ERTC or PPP issues should consider using independent counsel – rather than the advisors who filed their claims — especially where there is concern about these advisors being in the government’s crosshairs