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Why IRS CI is Targeting Businesses that Received PPP Loans and Claimed the ERTC

News, Offshore Account Update

Posted in on March 31, 2023

The Paycheck Protection Program (PPP) and Employee Retention Tax Credit (ERTC) were relief programs intended to help support qualifying businesses during the COVID-19 pandemic. Unfortunately, both of these programs became targets for fraud; and, as a result, IRS Criminal Investigation (IRS CI) is now scrutinizing businesses in Virginia and other states that took advantage of these programs.

IRS CI investigations present substantial risks for businesses and their owners. While IRS audits can lead to civil liability, criminal investigations can lead to both fines and federal imprisonment. As a result, business owners who have concerns about facing scrutiny related to their PPP loans and/or ERTCs should consult with an experienced tax lawyer promptly.

PPP and ERTC Issues that Can Lead to Criminal Prosecution for Business Owners

There are several issues that can lead to criminal prosecution for business owners related to the PPP and ERTC. Crucially, however, in order to substantiate charges for criminal tax fraud, IRS CI must uncover evidence of intentional misconduct. While inadvertent errors can lead to liability for back taxes, interest and civil penalties (and this liability can be substantial), they do not warrant criminal prosecution.

With this in mind, some examples of the issues that can trigger criminal enforcement action related to the PPP and ERTC include:

  • Fraudulently Claiming Eligibility Under the PPP or ERTC Program – Fraudulently claiming eligibility under the PPP or the ERTC program can trigger criminal prosecution, and IRS CI has already pursued multiple cases in this area in 2023 (as well as prior years). If a business’s internal records suggest that its owners knew, or should have known, that the business wasn’t eligible, this can be enough to trigger criminal charges.  
  • Intentionally Claiming the ERTC for Wages Paid with PPP Funds – As the IRS explains, “Wages reported as payroll costs for PPP loan forgiveness or certain other tax credits can't be claimed for the ERC in any tax period.” Intentionally using PPP-funded wages to fraudulently claim the ERTC can trigger criminal charges as well.
  • Otherwise Misrepresenting Businesses’ Tax Liability on Their Federal Returns – Whether related to the ERTC or other credits, deductions or exemptions, business owners can also face criminal charges for misrepresenting their companies’ tax liability in other ways. When scrutinizing businesses’ PPP loan documents and tax returns, IRS CI Special Agents are looking for evidence of any and all forms of tax fraud.

IRS CI has identified several “red flags” for PPP and ERTC fraud. While these red flags are not necessarily indicative of fraud, they are enough to trigger scrutiny. Facing scrutiny from IRS CI presents serious risks in all cases; and, as a result, even business owners who had no intention of committing PPP or ERTC fraud must be prepared to defend themselves effectively.

Request a Confidential Consultation with Tax Lawyer Kevin E. Thorn in Virginia

Tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, has more than 15 years of experience representing clients in high-stakes federal tax matters. If you have concerns about facing IRS CI scrutiny related to your business’s PPP loan or employee retention tax credits, you can call 703-752-3752, email ket@thornlawgroup.com or contact us online to arrange a confidential consultation.

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