The Internal Revenue Service (IRS) investigation into tax crime around the pandemic-era Employee Retention Credit program is in high gear and looking into fraudulent claims. Processing of legitimate ERC remains ongoing at a slow pace.
Throughout the COVID-19 crisis and beyond, business owners filed for relief using the Employee Retention Credit. The program provides a refundable tax credit for eligible employers for specific employment taxes paid on wages after March 12, 2020, and before January 1, 2021. There are specific eligibility criteria for the tax credit, which were usually overlooked by promoters trying to make a fast buck to create a claim for an unsuspecting employer.
Because of a growing number of shady ERC applications, the IRS initiated an analysis of applications, payouts, and people promoting the tax credit as a pop-up business. Said IRS Commissioner Danny Werfel, “This is one of the most complex credits the IRS has administered, and we continue to ask taxpayers for patience as we unravel this complex process. Ultimately, this period will help us protect taxpayers against improper payouts that flooded the system and get checks to those truly eligible.”
The review has been completed and will be used to process lower-risk claims while denying ineligible claims. Notes Mr. Werfel, “The completion of this review provided the IRS with new insight into risky Employee Retention Credit activity and confirmed widespread concerns about a large number of improper claims. We will now use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to help taxpayers without any red flags on their claims.”
While headlines about fraudulent ERC claims are not new, it is worth noting that the IRS processed 28,000 claims during the program review period, with half of those claims, valued at about $1 billion, being denied. In this case, ignorance is not bliss—if you received a payout for an invalid ERC claim, the IRS expects you will pay it back in full, with penalties and interest likely added. If your claim was filed by a promoter—or by you—to make some quick cash, and you have not yet received payment, it is worth your while to speak with a tax attorney for advice about tax fraud and then consider withdrawing your claim.
Bottom line, as Mr. Werfel points out, “We continue to see instances where businesses were misled into filing dubious claims, and we urge people to review the guidelines and take steps to withdraw their claims to avoid future compliance action by the IRS.”
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