The potential penalties for mistakes or fraud related to Employee Retention Credit (ERC) claims can be severe. For unintentional errors or negligence, the IRS may impose a 20% penalty on the understated tax amount. If the IRS believes the taxpayer deliberately tried to evade taxes, a 75% penalty could apply on the portion of understated tax attributed to fraud. In extreme cases of deliberate fraud, individuals could face up to $100,000 in fines ($500,000 for corporations) and up to 5 years in prison.
Other potential penalties include a failure-to-deposit penalty of 2-15% of the underpaid amount if the disallowed ERC becomes an underpayment of payroll taxes, a requirement to repay the erroneously claimed ERC amount, and interest charges on underpaid taxes.
To mitigate audit risk and potential penalties, taxpayers should maintain accurate documentation supporting ERC eligibility, seek assistance from qualified tax professionals, conduct internal reviews of ERC claims, and respond promptly to any IRS inquiries. The severity of penalties depends on whether the IRS determines the errors were due to honest mistakes, negligence, or intentional fraud. Proper documentation and professional guidance are critical to avoiding or minimizing penalties.