IRS Investigates Tax Fraud in Employee Retention Credit Program

A program aimed at helping employers retain workers during the pandemic is now the subject of an IRS investigation.

According to the Internal Revenue Service (IRS), the Employee Retention Credit (ERC) is intended to assist qualified employers who continued to pay wages to employees between March 2020 and January 2022. The aim of the ERC is to assist businesses and organizations that were shut down by the pandemic, suffered a significant drop in receipts during a specified time frame, or qualify as a recovery start-up business during the third or fourth quarter of 2021.

Anyone who lived through the pandemic remembers the swift devastation of businesses and workers when COVID-19 swept through economies around the world. To bolster those businesses and their employees in the U.S., the Employee Retention Credit was created to keep businesses afloat by providing money to pay employees when revenues dropped.

The deadline for applying for the ERC is not until 2025, and pop-up businesses to serve applicants, fraudulent and otherwise, are thriving. While the IRS reports it has paid approximately $150 billion in tax credit refunds, it has no idea how many of those approved refunds were fraudulent.

In May 2023, the IRS circulated a business alert warning businesses of ERC scams. Notes IRS Commissioner Danny Werfel, "The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others. Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit."

Companies providing ERC application services usually charge a big upfront fee in return for the promise of risk-free refunds in the thousands of dollars. Earlier this year, a federal grand jury indicted two Utah businessmen with an $11M tax fraud involving fraudulent ERC and other tax credits. Like other fraudulent tax preparers, the two men were charged with filing false tax returns.

An attractive claim of these businesses is the promise of no-risk refunds. As a result, IRS criminal investigations and audits are on the increase for returns claiming ERC.  Taxpayers who received fraudulent refunds are on the line for the entire amount of the refund, interest, and penalties accrued—in addition to the possibility of criminal prosecution.

As the saying goes, “if it sounds too good to be true, it probably is.”  Speak with an experienced tax attorney if you have received an audit letter on your return.

Speak with our tax group if you are facing an IRS audit or criminal tax charge

Serving local and international clients from offices in Chicago and Cleveland, the legal team at Robert J. Fedor, Esq., LLC delivers strong representation to clients challenged by criminal tax litigation, payroll tax issues, or compliance questions. Call 800-579-0997 or contact us online today.