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No Chocolate/Flowers: IRS Dishes Out the Threat of ERC Penalties as its Valentines Gift to Taxpayers

By Anthony P. Daddino on February 16, 2024

The IRS was not feeling the love this past Valentine’s Day, releasing a new FAQ to its Employee Retention Credit Voluntary Disclosure Program that identifies the multitude of criminal and civil penalties that could apply to non-compliant taxpayers that choose not to participate in the program.

The new FAQ appears in its entirety below. This was one of several new FAQs added by the IRS on Valentine’s Day. A complete list of the IRS’ FAQs for the ERC VD is linked HERE.

Q5. What happens if I don't participate in ERC-VDP? (updated Feb. 14, 2024)

A5. The IRS continues to identify new methods of analyzing ERC claims to identify ineligible taxpayers. If you claimed and received ERC you're not entitled to, and you don't participate in ERC-VDP to correct it, you risk detection by the IRS, which could lead to substantial interest and penalties and increase your risk of criminal investigation and prosecution.

Civil interest and penalties that could apply to your employment tax liability depending on your particular facts and circumstances.

Type of interest or penalty Code section that provides authority to assess Interest or penalty rate
Interest IRC 6601 Varies quarterly, 1st quarter 2024 rate is 8%-10%
Failure-to-pay penalties IRC 6651(a)(2)
IRC 6651(a)(3)
Or 1/4% or 1%
Failure-to-file penalties IRC 6651(a)(1) 5-25%
Failure-to-deposit penalties IRC 6656(a) 2-15%
Accuracy-related penalties IRC 6662(a) 20%
Civil fraud penalties IRC 6663 75%
Fraudulent failure-to-file penalties combined with the failure-to-file penalties IRC 6651(f) 15-75%
Trust fund recovery penalties IRC 6672 Equal to total amount of the tax evaded, or not collected, or not accounted for and paid over.

Criminal charges related to taxes can include, but are not limited to, tax evasion (IRC 7201), filing a false return (IRC 7206(1)), false claims (18 USC 287) and false statements (18 USC 1001). A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000.  Please note that if you willfully filed an employment tax return that fraudulently claimed ERC, or if you assisted or conspired in such conduct, filing for ERC-VDP will not exempt you from potential criminal investigation and prosecution.

The IRS seems to be heavy on the stick, and not so much the carrot, in its approach to ERC compliance.  Taxpayers would be well advised to review their ERC claims to bolster their arguments in anticipation of IRS scrutiny and in appropriate circumstances seek remediation to reduce IRS risk exposure.

If you have any questions about this Blog post or any other Treasury, IRS or tax-related matter, feel free to contact me directly at (214) 749-2464 or adaddino@meadowscollier.com.