IRS Takes Next Steps in Combating Employee Retention Credit Fraud

The Employee Retention Credit (ERC), a refundable payroll tax credit intended to provide relief for businesses who kept their employees on the payroll during the height of the COVID-19 pandemic, has recently received increased scrutiny by the IRS. When the program was announced, ERC promoters sprang up to assist businesses with applying for the credit.

Since the ERC’s inception, the IRS has observed fraudulent ERC claims pushed by certain ERC promoters. With an uptick in ineligible claims submitted in 2023, the IRS went so far as to add fraudulent ERC claims to the top of its “Dirty Dozen” list of tax scams. Additionally, in September 2023, the IRS suspended processing new ERC applications due to the volume of problematic ERC claims and misinformation spread by ERC promoters. As of the date of this publication, the IRS has not resumed processing. The IRS has initiated many ERC audits to date and may pursue criminal action in egregious instances of fraud. 

On December 6, 2023, the IRS announced that 20,000 ERC rejection letters were recently mailed for ERC claims where either the business claiming the credit did not exist, or the business did not have employees during the periods eligible for the credit. The initial rejection letters are intended to prevent ERC claims that obviously do not meet the requirements for the credit from being processed further, and possibly pushing the taxpayer into an audit.

To assist businesses that filed for the ERC credit and are no longer certain they meet the eligibility criteria, the IRS created a process whereby filers may withdraw their claim. The IRS is also in the process of developing a program to allow businesses who received ineligible ERC payments to come forward voluntarily. 

ERC rules are complex, and the IRS’s flurry of action regarding ERC claims has resulted in a whirlwind of developments on this front. Stay tuned for additional updates from Johnson Lambert as more information becomes available. As always, please contact the Johnson Lambert Team for any future service needs.

Disclaimer: The content contained herein is provided solely for educational purposes to Johnson Lambert LLP’s intended audience, and should not be relied upon as accounting, tax, or business advice because it does not take into account any specific organization’s facts and circumstances.