The Internal Revenue Service (IRS) says it has uncovered over $1 billion in potentially fraudulent pandemic-era tax credit claims in the last six months alone, with another $3 billion in potentially bad claims that are being looked into by its criminal investigations unit.
“The IRS has made important progress in our compliance efforts protecting more than $1 billion in revenue in just six months, but we remain deeply concerned about widespread abuse involving these claims that have harmed small businesses,” IRS Commissioner Danny Werfel said in a statement.
The ERC is a refundable tax credit designed for businesses that continued paying employees during COVID-19 lockdowns.
A tidal wave of bad ERC claims were pushed by predatory promoters on unwitting businesses, leading the IRS to ramp up its enforcement activities to prevent improper claims from being paid out and slimming the agency’s tax revenues.
Besides imposing a freeze on filing new ERC claims on Sept. 14, 2023, the IRS also rolled out several programs meant to give businesses that incorrectly claimed the credit a chance to pay it back with minimal penalty.
The IRS said that, in addition to the $1 billion in foiled bad claims, the IRS Criminal Investigation unit is reviewing another $3 billion in potentially fraudulent or otherwise improper claims.
The IRS has found that over 12,000 entities filed over 22,000 bad claims that resulted in $572 million in assessments.
Voluntary Disclosure Program
The voluntary disclosure program, which was first unveiled in December 2023, lets employers who wrongly filed for the ERC get right with the tax authorities by admitting to the mistake.In exchange for volunteering this information, businesses get to keep 20 percent of the incorrectly received credits, and they won’t be charged any interest or penalties on the remaining 80 percent that they repay.
Those that are unable to repay the 80 percent can potentially be approved for an installment agreement, which will let them pay it back over a longer period.
Program applicants must not be under criminal investigation, nor be under an IRS employment tax examination, nor can they have received an IRS notice and demand for repayment of the ERC.
The IRS is also using the program to get at unscrupulous promoters who used aggressive marketing techniques to lure businesses into wrongly claiming the ERC.
In order to qualify for the program, employers must provide the IRS with the names, addresses, and telephone numbers of any advisers or tax preparers who advised or assisted with the claims.
The IRS said on March 22 that the voluntary disclosure program has yielded $225 million from over 500 taxpayers, with another 800 submissions still being processed.
The deadline for making submissions under this program was March 22 but the IRS said it might reopen the program at a future date, though this would require Congressional action to extend the statute of limitations for ERC claims.
Withdrawal Program
Another program the IRS rolled out in October 2023 was a special withdrawal process that lets businesses that filed a questionable claim withdraw it and avoid the risk of costly penalties and interest.The withdrawal option lets employers avoid future problems by withdrawing pending ERC claims if they suspect they may have been tricked into filing and have not yet been paid.
Even if a business has received the ERC refund check but hasn’t yet cashed or deposited it, it can still withdraw its claim.
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.
The IRS said on March 22 that this program has led to 1,800 withdrawing $251 million worth of claims.
The withdrawal program remains open beyond March 22 so businesses with unprocessed bad ERC claims continue to have an option to pull back on them.
