The Internal Revenue Service (IRS) announced on Thursday that it is taking action to address the misuse and abuse of a pandemic-era employer tax benefit known as the Employee Retention Credit. This tax credit, designed to aid businesses during the COVID-19 pandemic, has become a target for fraudulent claims, costing the federal government billions of dollars. The IRS is taking steps to curb these abuses and has placed a moratorium on new claims for the credit.
The agency has also taken the initiative to investigate thousands of claims for the Employee Retention Credit, with over 250 criminal investigations launched, involving nearly $3 billion in potentially fraudulent claims. This reflects the seriousness of the issue and the need to protect federal funds from being wrongly disbursed.
Demonstrate the impact of the pandemic
The Employee Retention Credit was established as part of the initial $2 trillion pandemic relief legislation in response to the economic fallout from the pandemic. It aimed to provide financial support to businesses facing economic hardships due to COVID-19. Businesses, including nonprofits and churches, could apply for up to $26,000 per employee if they could demonstrate the impact of the pandemic on their operations and revenue.
However, the IRS has raised concerns about the misuse of this program by unscrupulous entities referred to as “tax mills.” These organizations, including accounting firms, have been actively encouraging ineligible individuals and businesses to submit claims, often based on inaccurate interpretations of the program’s rules. Some of these entities receive commissions or a percentage of the refund, further incentivizing fraudulent claims.
Employee Retention Credit: IRS Audits Have Started + Who Can Claim the ERC Tax Credit
To address these issues, the IRS has implemented several measures:
- Moratorium on New Claims: The IRS has temporarily halted the acceptance of new claims for the Employee Retention Credit to prevent further misuse of the program.
- Refunds Slowdown: The agency is slowing down the processing of refunds for previously submitted applications, allowing for careful review and verification.
- Encouraging Withdrawals: Taxpayers who believe they may be ineligible for the credit are urged to withdraw their applications voluntarily.
- Criminal Investigations: The IRS has initiated criminal investigations into potentially fraudulent claims, signaling its commitment to pursuing wrongdoers.
IRS Commissioner Daniel Werfel expressed deep concern over the program’s misuse, stating that the intention was for only a limited number of claims to be submitted. However, the IRS has experienced an overwhelming influx of claims, indicating a widespread issue of abuse.
The IRS will keep the moratorium in place until at least the end of the year while they continue to investigate and address the misuse of the Employee Retention Credit. It is essential to protect the integrity of government funds and ensure that those who genuinely need assistance receive it, while preventing exploitation by fraudulent actors.
