IRS Sees Red Flags for 'Vast Majority' of ERC Claims

By Erin Slowey, Bloomberg News (TNS)

The IRS will deny tens of thousands more pandemic-era employee credit claims it deems potentially fraudulent in the coming weeks, as it remains in a holding pattern for processing new claims, the agency said Thursday.

The update follows months of fraud surveillance at the agency on the employee retention tax credit, created to help struggling businesses keep their doors open and employees on the payroll during the Covid-19 pandemic. The credit became enmeshed in fraud, with third-party companies encouraging taxpayers to claim it when they didn’t qualify.

“We’re seeing clear indicators that the vast majority, at least 70% of the ERC claims currently awaiting processing have red flags about their accuracy,” IRS Commissioner Danny Werfel said during a press call Thursday.

In September, the IRS halted processing new claims and slowed processing those made before the moratorium. The agency initially said it anticipated lifting the pause in late spring but it is still sifting through its backlog, leaving many businesses and nonprofits without their refunds for an unknown period of time. Since the pause, the IRS processed 28,000 claims worth $2.2 billion and disallowed more than 14,000 claims worth over $1 billion, the agency said Thursday.

The IRS’s current backlog of claims sits at 1.4 million. After the processing pause, the agency was receiving claims at a rate of more than 17,000 a week.

“We worry that ending the moratorium might trigger a renewed marketing push by aggressive promoters that could lead to a new round of improper claims, that would be a bad result for taxpayers and tax administration,” Werfel said. “By continuing the moratorium, we will use this time to consult with Congress and seek additional help from them on the ERC program.”

The IRS is asking Congress to close the ERC program to additional applications and extend the statute of limitations to allow the agency more time to pursue improper claims, Werfel said. These changes are included in a stalled House-passed tax bill, which has dim prospects because Senate Republicans are largely opposed.

Measuring risk

The IRS strategy on the ERC is now a risk-based approach after digitizing about 1 million claims worth about $86 billion. The IRS predicts between 10% and 20% claims are highest-risk and “show clear signs of being erroneous.”

Signs that a claim is invalid include if the business did not exist, reported too many employees, or wrongly calculated the credit.

Lower-risk claims filed before the pause will see payments start this summer. Taxpayers will not be able to call to find out what group they are in, Werfel said.

Werfel said that businesses may think they are safe and have no red flags but “many of these claims are simply not eligible under the law.”

The IRS has offered relief options for taxpayers who wrongly claimed the credit. Taxpayers who have yet to receive a refund can withdraw their claim, and taxpayers who already got their checks could have voluntarily come forward earlier this year and agreed to pay back some of the credit in exchange for their preparer’s information.

The withdrawal program, which is still open, has led to 4,800 entities withdrawing $531 million. The voluntary disclosure program reaped $1.09 billion from over 2,600 applications. The IRS said it will make announcement on whether it will reopen the voluntary disclosure program in the coming months, though the terms will likely not be as favorable. The original program had closed March 22.

IRS Criminal Investigation has initiated 450 criminal cases, with potentially fraudulent claims worth nearly $7 billion, as of May 31. The efforts have resulted in 36 investigations in federal charges, 16 convictions, and seven sentencings.

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