What kind of penalties are we talking about if someone gets audited and the IRS rejects their claim? Is it just paying back the money or are there additional fines?

If the IRS determines an ERC claim was improper, they can require repayment of the full credit amount plus interest (which is currently at a high rate). In cases where they determine the claim was recklessly or intentionally improper, they can also assess accuracy-related penalties of 20% or even fraud penalties of 75% of the underpayment. There's also the cost of defending an audit, potential damage to banking relationships if a large repayment is suddenly required, and the business disruption of dealing with an extended examination.

Thanks for sharing this - this is exactly what I'm worried about. I keep trying to explain the risks to my client but he only sees the dollar signs and not the potential consequences. Did your brother's business have any specific government orders that restricted their operations, or was it purely the "supply chain" angle that the ERC company used?

He had to close for about 3 weeks in early 2020 like most retail, but reopened with masks/distancing requirements. The ERC company focused mainly on "supply chain disruptions" claiming his inability to get some inventory items qualified as a partial suspension. The IRS disagreed completely. Their position was that since his overall revenue increased and he found alternative products to sell, he clearly wasn't significantly impacted in a way that qualified. The business had its best year ever during COVID because people were shopping locally instead of at malls.

I didn't even think about the Head of Household status! Does that make a big difference in the tax calculation? And would I still qualify for that even if I end up letting her claim our daughter as a dependent this year?

Yes, Head of Household status makes a significant difference! For 2024 taxes (filed in 2025), the standard deduction for HOH is $21,900 versus just $14,600 for Single filing status. That's a $7,300 difference in taxable income right off the bat, which could save you thousands depending on your tax bracket. You can still qualify for Head of Household even if you let your ex claim your daughter as a dependent, as long as your daughter lives with you more than half the year and you pay more than half the cost of maintaining the home. The dependent exemption and Head of Household status are separate benefits.

Does that alternating years agreement need to be part of the formal custody arrangement, or can it just be a separate signed document between the two parents?

That's a really good point I hadn't considered. How would I check if my software is using the most current tax rules? Is there some version number or update date I should look for?

Most tax software will show the tax year version somewhere in the settings or about section. Look for something that says "Tax Year 2025" or "Updated for 2025 tax law changes." Some will even show the specific update date. If your software offers a way to view the actual IRS instructions they're using for calculations, that can help too. The most reliable way though is to check the preview of Schedule 8812 from both software programs - they should both reference the same tax year and use identical calculation methods for the Child Tax Credit.

The IRS calculator is decent but it doesn't handle some of the more complex situations. I'd also suggest running the numbers quickly through a third software like Cash App Taxes (formerly Credit Karma Tax) which is completely free regardless of income. Having a third calculation might help show which of your current ones is more likely correct.

Do the free versions of those tax programs actually include self-employment forms? I tried using one of the big free tax sites last year for my regular job and it kept trying to upsell me for everything.

You're right to be cautious. Many "free" tax sites do try to upsell, especially for self-employment forms. FreeTaxUSA includes Schedule C in their free version, but you pay about $15 for state filing. TaxSlayer's free version covers simple returns but charges for self-employment - their "Classic" tier ($29.95 last I checked) includes all self-employment forms. The IRS Free File program is also worth checking - if your income is under a certain threshold (usually around $73,000), you can access truly free filing options including self-employment forms. The key is to access these through the IRS Free File portal rather than going directly to the company websites.

I think we're overcomplicating things for someone who made $2,700. At that income level after taking the standard deduction, they'll likely only owe the self-employment tax portion. That's about $381 in SE tax (15.3% of $2,500 assuming minimal expenses).

Interesting point about international competition. Do other major economies like the EU, Japan, etc. also use flat corporate rates? Or are there any examples of major economies successfully using graduated corporate rates?

Yes, almost all major economies use flat corporate rates. The UK, Germany, France, Japan, Canada - all flat rates with various deductions and credits. China has a flat 25% standard rate with reductions for certain industries or regions. There are very few examples of graduated corporate rates in major economies. South Korea has a modestly graduated system with three brackets (10%, 20%, 22%), and the US actually had a slightly graduated system before the 2017 tax reform with brackets of 15%, 25%, 34%, and 35%, though with income phaseouts that effectively flattened it for many corporations. The trend globally has been toward flatter systems with targeted incentives rather than graduated rates.

Your facts about Amazon aren't quite accurate. While they did pay little federal income tax in some years (2017-2018 notably), that was because they used legal deductions for R&D, stock-based compensation, and carried-forward losses from earlier years when they weren't profitable. They've since paid billions in taxes. The tax code incentivizes certain behaviors like R&D and investment. That's by design, not cheating. And corporate profits that go to executive compensation get taxed as personal income at graduated rates. Stock buybacks now have an excise tax specifically to address that issue.