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What the IRS Wants Business Owners to Know About Tax Fraud

May 24, 2023


Business tax fraud costs the federal government hundreds of billions of dollars per year. As a result, combating business tax fraud is a top priority for the Internal Revenue Service (IRS). To help ensure that businesses pay what they owe, the IRS not only conducts audits and investigations but also publishes resources to help business owners understand their entities’ federal tax obligations.

For business owners, this is a double-edged sword. While having guidance from the IRS can be helpful in many circumstances (for example, the IRS’ guidance on the recent Employee Retention Credit (ERC) proved essential for many business owners), once the IRS issues guidance, business owners have no excuse for non-compliance. In this way, the IRS’ guidance serves as both a deterrent and an enforcement tool, and business owners need to ensure that they heed the agency’s advice in order to mitigate their risk of facing unwanted scrutiny.

5 Examples of Recent IRS Guidance for Businesses

So, what does the IRS want business owners to know about tax fraud? Here are some examples of the IRS’ recent guidance for businesses:

1. Employee Retention Credit (ERC) Eligibility

The Employee Retention Credit was a refundable tax credit made available to qualifying businesses during the federally declared COVID-19 pandemic national emergency. While the ERC was only available for the 2020 and 2021 tax years, many businesses that didn’t claim the credit on these years’ returns are filing now to obtain tax refunds from the IRS.

The IRS has identified the Employee Retention Credit as a target for fraud, and, as a result, it is scrutinizing businesses’ ERC claims. The IRS has also warned business owners to be wary of third-party ERC scams that involve helping non-qualifying businesses obtain refunds under the ERC. As a result, business owners need to be extremely careful when claiming the ERC, and those that have already claimed the credit should consider reassessing their eligibility.

2. Paycheck Protection Program (PPP) Loan Forgiveness Eligibility

The Paycheck Protection Program (PPP) was another pandemic relief program that proved to be both a financial lifeline for many businesses and a prime target for fraud. The cost of PPP fraud has been estimated at around $80 billion, which is about 10 percent of the total funding issued under the program.

Due to the widespread fraud perpetrated under the PPP, the IRS and its Criminal Investigation Division (IRS CI) are continuing to investigate businesses that received loans under the program. This includes investigating businesses that fraudulently certify their eligibility for loan forgiveness. To receive forgiveness, business owners must certify under penalty of perjury that their companies have used their PPP funds only for authorized purposes, and fraudulent certifications can lead to civil or criminal enforcement.

3. Employer Trust Fund Tax Compliance

Under the Internal Revenue Code (IRC), employers are required to withhold income, Social Security and Medicare taxes from their employees’ wages (in addition to paying their own share of these taxes to the IRS). Employers must hold these withheld taxes in trust until paying them over to the federal government.

To enforce compliance with the trust fund requirement for withheld employment taxes, the IRS has recently adopted the Trust Fund Recovery Penalty (TFRP). Crucially, the TFRP applies to “responsible persons,” or the individuals who are charged with ensuring that a business timely pays over the withheld employment taxes in its possession. Responsible persons can include owners, officers, directors and others in positions of authority within a business organization.

As the IRS explains, “You can avoid the TFRP by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required.” Of course, for many business owners, this is easier said than done. Effectively managing employment tax compliance presents a variety of challenges, and while the TFRP only applies to willful violations, even inadvertent mistakes can lead to intense scrutiny from the IRS.

4. Business Expense Deduction Compliance

Deducting eligible business expenses can significantly reduce a company’s taxable income. However, improperly claiming business expenses can trigger an IRS audit and potentially lead to substantial liability for back taxes, interest and penalties. The IRS has published extensive guidance on the eligibility of business expenses as tools for reducing companies’ federal income tax liability, and it pays close attention to claimed business expense deductions that are often abused and that have hallmarks of fraud.

Travel, transportation, meals, entertainment, home office expenses, charitable contributions and a wide range of other business expenses fall into these categories. While these all can be legitimate business expenses, they are also often abused. To withstand scrutiny from the IRS, business owners must ensure not only that they are only claiming valid business expenses but also that they have adequate documentation to prove that these expenses qualify for deductions.

5. Bank Secrecy Act (BSA) and Foreign Account Tax Compliance Act (FATCA) Compliance

For companies that do business overseas and business owners who own offshore assets, compliance with the Bank Secrecy Act (BSA) and Foreign Account Tax Compliance Act (FATCA) is crucial. These federal laws establish reporting obligations for offshore bank accounts and other foreign financial assets, and they impose steep penalties for noncompliance.

The BSA and FATCA both require annual reporting and while there are reporting thresholds, most businesses’ and business owners’ offshore holdings will easily exceed the threshold amounts. There are various complexities to the reporting requirements under these statutes, but, despite these complexities, the IRS expects strict compliance. Failure to file a Report of Foreign Bank and Financial Accounts (FBAR) or IRS Form 8938, failure to disclose all foreign financial assets and various other shortcomings can cause the IRS to examine the entirety of businesses’ and business owners’ filings.

Contact Brown Tax, P.C. in Fort Worth for More Information

If you have questions about your (or your business’s) federal tax obligations or if you have been contacted by the IRS or IRS CI, we encourage you to contact us promptly for more information. To arrange a confidential initial consultation at Brown Tax, P.C., please call 888-870-0025 or inquire online today.

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