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The Employee Retention Credit (ERC) is now a top IRS audit target, with the agency cross‑checking eligibility against government orders, payroll data, and revenue declines. Aggressive marketing that promises quick refunds often skips required documentation, exposing firms to fraud investigations. Poor record‑keeping can quickly shift a disallowed claim into a civil fraud case, invoking up to a 75% penalty and potential criminal prosecution. Employers must maintain precise eligibility, wage, and payroll substantiation to avoid severe penalties and state‑level repercussions.
The IRS’s civil fraud penalty, codified at IRC §6663, imposes a 75% surcharge on any underpayment proven to stem from intentional tax evasion. Examiners rely on “badges of fraud” – patterns such as unexplained income spikes, missing records, and contradictory statements...
Basis substantiation audits focus on a taxpayer’s outside basis in partnerships and stock or debt basis in S corporations. The IRS examines how partners compute outside basis, especially liability allocations, while S‑corp shareholders must complete Form 7203 to prove loan documentation...
