Small Business Owners Accused of ERC Misuse: What Legal Defenses Are Available?
The Employee Retention Credit (ERC) provided much-needed relief to businesses affected by the COVID-19 pandemic. However, as the Internal Revenue Service (IRS) increases its enforcement efforts, many businesses are now facing audits, investigations, and allegations that they improperly claimed the credit. Now, not every ERC inquiry automatically means fraud happened. In many cases, the issue involves eligibility questions, calculation errors or reliance on incorrect advice. If your business has come under scrutiny, understanding the available legal defenses is essential.
Why Are Businesses Facing ERC Investigations?
The ERC rules changed several times between 2020 and 2021, making eligibility and credit calculations challenging for many employers. As a result, some businesses submitted claims that the IRS does not believe are correct.
Investigations often involve the following allegations:
- Claiming the ERC without meeting eligibility requirements
- Including wages that didn’t qualify for the credit
- Incorrectly calculating the amount of the credit
- Exceeding the maximum allowable credit
- Submitting inaccurate payroll records or supporting documentation
What Legal Defenses May Be Available?
The appropriate defense depends on the specific facts of the case, but several legal arguments may apply, including:
- Your Business Was Eligible for the ERC
If your business met the legal requirements for the credit, documentation such as payroll, financial records, and government shutdown orders may help establish that your claim was valid.
- The Credit Was Calculated Correctly
Even when a business qualified for the ERC, the IRS may question the amount claimed. In this case, payroll records, tax filings, accounting records and calculation worksheets can help demonstrate that the credit was properly calculated.
- There Was No Intent To Commit Fraud
Criminal tax fraud generally requires proof that the taxpayer acted willfully. If you have evidence showing an honest misunderstanding of the complex ERC rules rather than intentional deception, it can prevent you from being charged with criminal offenses.
- You Reasonably Relied on Professional Advice
Many businesses worked with accountants. payroll providers or tax professionals when preparing their ERC claims. If you relied in good faith on qualified professional guidance, you can use that as a defense. Gather emails, letters, written advice and other communication that demonstrate your actions were based on professional recommendations rather than an intent to commit fraud.
- The Government Cannot Prove Its Allegation
The burden remains on the government to establish fraud. If the available evidence is incomplete or fails to support the allegations, your attorney may use the weakness as part of the defense strategy.
Are There Alternatives to Litigation?
Not every ERC dispute ends in court. Depending on the circumstances, you may have other options, including:
- Amending previously filed returns
- Correcting errors
- Participating in IRS voluntary disclosure or withdrawal programs when appropriate
These options can have significant legal and financial consequences. Therefore, before taking a particular route, it’s best to consult experienced legal counsel for a careful evaluation. Additionally, if your business has received an ERC audit notice or is under investigation, responding quickly is crucial. An experienced attorney can evaluate the allegations, preserve critical evidence and develop a strategy tailored to your situation.
Contact Us for Legal Help
If your business is facing questions about an ERC claim, contact our Miami Business litigation lawyer at Valero Law today by calling 305-607-7011. We serve clients in Davie, Broward County, Coconut Grove, and Miami-Dade County.
Source:
irs.gov/coronavirus/employee-retention-credit
