IRS Provides Updates on Efforts to Combat ERC Fraud Via Various Programs

Published: May 23, 2024
By: Anthony Aliantro; Sergio Fuentes
Topics: Tax

Employee Retention Credit
Share

During the COVID-19 pandemic, Congress passed emergency legislation creating the Employee Retention Credit (“ERC”). This refundable tax credit was meant to offer relief to eligible businesses and tax-exempt organizations that had employees and were adversely affected by the pandemic.

Nearly four years after the creation of the ERC, the IRS continues to be overwhelmed by the number of claims it is still receiving, many of which the agency believes may be erroneous. In response, the agency has turned to multiple programs to discourage these erroneous claims and offer some relief to taxpayers who may have been led astray by unscrupulous promoters to claim the credit. Recently, the IRS indicated it will continue to focus on enforcement efforts in an attempt to claw back what could be billions of dollars of erroneously claimed ERC refunds.

Verifying Eligibility for ERC

During the pandemic, businesses that experienced a full or partial suspension due to government orders, significant declines in gross receipts, or, for the third and fourth quarter of 2021, were a Qualified Recovery Start-Up Businesses were eligible for the ERC.

Originally, the credit was equal to 50% of the first $10,000 of an employee’s qualified wages, with a maximum allowable credit of $5,000 for each employee for the year. In 2021, the credit was increased to 70% of the first $10,000 of qualified wages per employee, per quarter, for the first three quarters of 2021 . The intent was to enable these businesses to keep their employees on their payroll and receiving benefits, even if they were shut down by government orders during the pandemic.

To assist employers and practitioners in determining whether they have a valid ERC claim, the IRS has developed an Employee Retention Credit Eligibility Checklist for taxpayer and practitioner reference. Additionally, the IRS has provided seven signs an ERC claim could be incorrect, including:

Too many quarters being claimed.
Government orders that don’t qualify.
Too many employees and wrong calculations.
Business citing supply chain issues.
Business claiming ERC for too much of a tax period.
Business didn’t pay wages or didn’t exist during eligibility period.
Promoter says there’s nothing to lose.

Erroneous Claims and Moratorium

As a result of the changes for 2021, an employer could theoretically be eligible for up to $26,000 per employee if they met the requirements for all four quarters the credit was available. Unfortunately, the potential for such large refunds led to some businesses filing erroneous claims for the credit. Many unscrupulous promoters enticed employers to file claims regardless of eligibility by promising them tens of thousands of dollars in exchange for an upfront fee.

In an effort to combat fraud and encourage taxpayers to reevaluate their claims, the IRS announced on September 14, 2023, that it was implementing a moratorium on the processing of new ERC claims, effective that day. The agency will continue to process claims submitted prior to the moratorium but with more scrutiny and at a much slower rate. Taxpayers may still file claims, but they will not be processed until the moratorium is lifted. Currently, the IRS does not have a specific date that the moratorium on new ERC claims will end.

Taxpayer Relief and Disclosure Programs

The IRS has introduced a few programs intended to assist employers who may have been encouraged to file an erroneous claim. These include the Voluntary Disclosure Program (“VDP”) and a pending claim withdrawal program.

Voluntary Disclosure Program

To alleviate the burden on innocent taxpayers, the IRS launched the Voluntary Disclosure Program (“ERC-VDP”) on December 21, 2023. Under the VDP, businesses were required to repay 80% of any credit received, but not any interest. Additionally, any interest received would not be included in taxable income. The IRS suspended the ERC VDP on March 22, 2024. The IRS has hinted that it may reopen the VDP at a future date depending on whether Congress extends the statute of limitations for ERC claims.

Claim Withdrawal Program

The IRS’ withdrawal program for unprocessed ERC claims remains open for taxpayers seeking to avoid penalties, interest, and potential recapture of improper claims. The withdrawal program will not be indefinite, but the IRS has not set a specific end date yet.

Taxpayers may avail themselves of the withdrawal process if a specific set of criteria are satisfied, the primary ones being that the entire ERC claim is being withdrawn and the IRS has not paid the claim yet (or the check has not been cashed or deposited).

Focus on Promoters

The IRS is also focusing its attention on targeting promoters who falsely promised widespread eligibility for the credit. Form 15434, Application for Employee Retention Credit Voluntary Disclose Program, required taxpayers to disclose information about advisors who assisted them in making their ERC claim. The IRS is also actively prosecuting promoters of this credit under civil and criminal enforcement efforts. According to the IRS, as of February 29, 2024, it has “initiated 386 criminal cases worth $3 billion,” with 25 of those investigations resulting in federal charges and convictions.

Program Outcomes

As explained by the IRS in its press release, the disclosure and withdrawal programs were implemented to protect businesses from ERC promoters that shared misleading information or misrepresented eligibility rules and lured businesses to apply for the ERC. The appeal of these initiatives is evident from the results.

Since the fall of 2023, ERC compliance efforts have protected more than $1 billion in revenue. At least $251 million was recovered from the claim withdrawal process and over $225 million through the VDP. At a recent Congressional hearing, Commissioner Werfel informed Congress that another 800 submissions from the VDP have yet to processed.

The IRS has set forth specific processes for taxpayers that seek to take advantage of the ERC relief programs offered. It is imperative that taxpayers follow these guidelines to avoid the imposition of claim recapture, penalties, and interest. Taxpayers with concerns over their ERC claims should consult a trusted tax advisor.