IRS Warns Taxpayers of Penalties Over Questionable Pandemic-era Tax Credits

Internal Revenue Service (IRS) building in Washington on Oct. 16, 2023. Madalina Vasiliu/The Epoch Times

The Internal Revenue Service (IRS) has issued a warning to taxpayers, signaling potential penalties over dubious pandemic-era tax credits that were aggressively pushed by unscrupulous marketers and led to a surge of bad claims.

The warning—which includes a new option that could help taxpayers avoid penalties for improper claims—relates to a flood of bad claims for the pandemic-era relief program known as the Employee Retention Credit (ERC). This is a refundable tax credit designed for businesses that continued paying employees during COVID-19 shutdowns.

Because of a large number of improper ERC claims pushed by predatory promoters on unwitting businesses, the IRS on Oct. 19 announced a special withdrawal process that allows businesses that filed a questionable claim to withdraw it and avoid the risk of getting an illegal refund that could prove costly.

Anyone who improperly claims the ERC must pay it back, possibly with penalties and interest, with the IRS warning that a business or tax-exempt group could find itself in a much worse cash position if it has to pay back an improperly claimed tax credit than if they had never claimed it in the first place.

“The aggressive marketing of these schemes has harmed well-meaning businesses and organizations, and some are having second thoughts about their claims,” IRS Commissioner Danny Werfel said in a statement. “We want to give these taxpayers a way out.”

The new option lets employers “avoid future problems” by withdrawing pending ERC claims that they suspect they may have been tricked into improperly filing.

Claims that are withdrawn will be treated by the IRS as if they were never filed, and the agency won’t impose penalties or interest.

Even if a taxpayer has received the ERC refund check but hasn’t yet cashed or deposited it, they can still withdraw their claim.

The credit, which is complex, is available to employers, not individual taxpayers.

‘Staggering’ Level of Misleading ERC Marketing

Under the current law, businesses can typically continue to file claims for the ERC tax credit until April 15, 2025.

Since the program was enacted, over 3.6 million claims have come in, with ERC-related fraud becoming a growing issue over time.

The IRS found out over the summer that the further out from the pandemic, the bigger the percentage of illegitimate ERC claims. This is due to what IRS Commissioner Danny Werfel called an “onslaught” of misleading marketing from predatory promoters pushing businesses to file dubious claims.

“The amount of misleading marketing around this credit is staggering, and it is creating an array of problems for tax professionals and the IRS while adding risk for businesses improperly claiming the credit,” Mr. Werfel said in a statement in July 2023, when the problem first came to light in a major way.

“A terrible scenario is unfolding that hurts everyone involved—except the promoters,” he said at the time, warning businesses to be on guard.

Since then, the problem has only gotten worse, forcing the IRS to announce in mid-September a moratorium on processing new ERC claims through the end of the year and announcing stricter compliance reviews for claims received before the moratorium.

Faced with the growing problem of fraudulent ERC claims, the IRS promised to help businesses caught up in the aggressive ERC marketing dragnet by developing a new repayment program for those who received an improper ERC payment.

While the settlement program has yet to be finalized, the IRS has now rolled out the special withdrawal option that lets taxpayers who were misled by promoters avoid possible repayment issues.

However, the IRS warned businesses that willfully filed fraudulent claims or conspired to do so that using the special withdrawal option won’t exempt them from potential criminal investigation and prosecution.

Because of the complex nature of ERC credits, the IRS recommends businesses seek out a trusted tax professional who understands the complexity of the rules around the credits rather than a promoter or marketer “trying to get a hefty contingency fee while taking advantage of honest taxpayers.”

ERC Scam Warning Signs

When it announced the ERC claim moratorium in September, the IRS updated its guidelines on the tax credit and with them, warning signs of ERC scams.

Scammers use a number of different tactics to mislead people who have no chance of meeting the ERC claim requirements.

Warning signs of such tactics include unsolicited calls, fake letters, and online ads, offering quick eligibility checks and promising easy applications. These schemes often involve large upfront fees or a percentage of the refund amount, putting businesses at risk of financial loss.

Other warning signs include promoters refusing to sign ERC filings, leaving taxpayers exposed, and omitting key details about eligibility requirements. Scammers also often fail to mention specific ERC limitations, such as eligibility criteria and the need to reduce wage deductions, leading to potential legal issues.

Because of the complexity of ERC claims, the IRS advised businesses and individuals to be cautious and seek guidance from reliable sources.