IRS Halts Processing of New Claims for Employee Retention Credit Due to Fraud Concerns
The Internal Revenue Service (IRS) has announced that it will temporarily stop processing new claims for the Employee Retention Credit (ERC), a tax-relief program created by Congress in March 2020. The program aimed to prevent layoffs during the early months of the COVID-19 pandemic but has now become a breeding ground for fraud.
The IRS has expressed concerns that many of the applications for the credit are unwarranted or fraudulent. In recent months, the number of claims has skyrocketed, with over 3.6 million businesses filing for the ERC, accounting for roughly a quarter of all businesses that file tax returns annually.
IRS Commissioner Daniel Werfel stated, “More than two years removed from the heart of pandemic economic disruption, we are deeply concerned that this program is not operating as it was intended.” Werfel also highlighted the aggressive marketing tactics used by some businesses to convince employers that they are eligible for the credit, even if they are not.
The agency will suspend processing any new claims for the credit until the end of 2023, or even longer. However, applications that have already been submitted will still be processed, though there may be significant delays as the IRS carefully scrutinizes their eligibility.
To address the issue, Werfel announced that the IRS will implement a new process for businesses to withdraw their claims without penalty if they believe they do not qualify for the credit. Additionally, the agency will introduce a settlement program that allows businesses to voluntarily repay unmerited credits at a favorable rate.
The ERC was originally intended for businesses severely affected by the pandemic, such as those with a steep decline in revenue or those fully or partially shut down by government orders. However, fraudulent ads have promised any business a $26,000 refund for each employee, leading to an influx of claims.
Laurel Blatchford, a Treasury Department official, has called for new legislation from Congress to address the widespread fraud. Suggestions include banning contingency arrangements where businesses file tax claims for free in exchange for a cut of the refund, as well as granting the IRS the authority to regulate all paid tax preparers involved in such claims.
Deputy Treasury Secretary Wally Adeyemo has sent a letter to the leaders of the Senate Finance Committee, urging them to consider legislation that effectively tackles the issue.
The IRS has already paid out over $230 billion to employers who claimed the ERC, surpassing the initial congressional estimate for the cost of the program. Criminal investigators are currently examining hundreds of suspicious claims totaling $2.8 billion and conducting thousands of civil audits. Fifteen cases have resulted in criminal charges, including some that have led to prison sentences.
As the IRS works to address the fraud concerns surrounding the Employee Retention Credit, it is evident that further actions and regulations may be needed to prevent future abuse of tax-relief programs.