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In the wake of government relief programs launched during the COVID-19 pandemic, a troubling trend has emerged: a surge in fraudulent claims. One program particularly impacted by this is the Employee Retention Credit (ERC), where the IRS has sent out more than 20,000 rejection letters disallowing claims made by scammers and false promoters.
The Employee Retention Credit (ERC) is a refundable tax credit program established by the US Government as part of the CARES Act. It incentivizes certain eligible businesses to offset the cost of employee wages and certain health insurance benefits. This initiative aims to assist businesses facing revenue declines due to partial shutdowns by Government orders or other impacts during the COVID-19 pandemic, thereby facilitating workforce retention.
Unfortunately, the good intentions behind the ERC program were tarnished by unscrupulous individuals and businesses who saw it as an opportunity to make easy money. This led to a significant rise in bogus applications.
The fraudsters have exploited the program's complexity by distorting data to meet eligibility criteria and inflating employee wages or hours worked in their applications to manipulate potential payouts. In some cases, they have even created entirely fictitious businesses or used stolen identities to submit fraudulent claims for the IRS ERC credit.
The IRS, however, has been cracking down on this fraudulent activity. They've identified red flags, disallowed many ERC credit claims, and even launched criminal investigations in severe cases. This crackdown aims to protect taxpayer dollars and ensure the program's benefits reach those who truly deserve them.
Unsolicited Offers: Legitimate tax professionals won't resort to aggressive marketing tactics, and "Easy" ERC application promotions are a scam.
Guaranteed Eligibility: Promoters guaranteeing ERC eligibility without a thorough review of the business's situation are likely trying to mislead.
High Credit Amounts: A suspiciously high calculated credit compared to a business’ size or payroll could be a red flag.
Fake Businesses: New businesses with no verifiable online presence or ownership inconsistencies raise red flags.
Since the program started, the IRS has received approximately 3.6 million ERC claims. At the end of FY 2023, the IRS had about 800,000 unprocessed Form 941-X claims, 95 percent (762,000) of which contained claims for the ERC credit.
As a result, on September 14, 2023, the IRS announced that it was immediately pausing processing of new claims due to its concerns about the legitimacy of many of the ERC refund claims, putting aggressive promotion of the ERC at the top of its "Dirty Dozen" list of tax scams for 2023.
Repayment: The business will be required to repay the entire amount of the erroneously received ERC credit.
Penalties and Interest: The IRS may impose significant penalties and interest charges on top of the repayment amount.
Audits and Potential Criminal Charges: Disallowed ERC credits can trigger a full IRS audit of the business's tax filings. In severe cases of intentional fraud, the IRS or the Department of Justice might pursue criminal charges. As a result of these efforts, IRS Criminal Investigation has initiated 252 criminal investigations involving over $2.8 billion in potentially fraudulent ERC claims.
The IRS further urges taxpayers to validate eligibility before filing a claim, particularly because "a promoter can collect a contingency fee of up to 25% of the ERC refund," which could lead taxpayers to be "in a much worse financial position if it has to pay back the credit than if the credit was never claimed in the first place."
Don't risk penalties and audits! Before claiming the ERC, thoroughly understand the eligibility requirements. Consulting a qualified tax professional can ensure your claim adheres to all regulations.
The IRS also provides valuable resources to help businesses navigate the ERC program legitimately. Here's a great resource for learning how to file legitimate ERC claims for your clients without jeopardizing the business.
Introduced by the IRS in December 2023, the ERC claim withdrawal process allows businesses that filed an ERC claim to withdraw it before receiving a refund. This also includes claims whose refund has been generated but ERC hasn’t been paid yet, or those who received a check but haven’t cashed or deposited it.
This might be useful if they realize they weren't eligible after filing. Withdrawn claims will be treated as if they were never filed, and the IRS will not impose penalties or interest.
The IRS also introduced a Voluntary Disclosure Program, a temporary program with a deadline of March 22nd, 2024, for businesses that had already received the ERC and were not eligible to use the withdrawal process.
As of March 2024, the IRS's moratorium on processing new claims has been extended indefinitely. Though initially set for December 2023, it has been extended for the foreseeable future. In simple terms, the IRS is still not accepting new applications for the ERC credit, and the IRS Commissioner has stated there's "no definitive timetable" for when it will resume processing new claims.
The IRS still focuses on processing existing claims and weeding out fraudulent activity. In the future, they may announce new programs to resolve erroneous claims. Taxpayers who are unsure about their eligibility or concerned about existing claims should consult a tax professional.
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The Authors, Allen Smith is a Practicing Certified public accountant and senior vice president at myCPE – Continuing Education Platform for Professionals. He understands the current needs of the education domain and strategies for the presenters to adapt the new changes.
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