Internal Revenue Service Announces Plan for Compliance Efforts Regarding Employee Retention Credit

When the COVID-19 pandemic hit, the IRS introduced the Employee Retention Credit (ERC) as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The purpose of this tax credit was to help businesses that were shut down by a government order or experienced a significant decline in gross receipts. Employers eligible for the ERC could claim the credit on an amended employment tax return for the qualifying period.

While some eligible taxpayers filed legitimate claims, several others filed improper claims as a result of aggressively promoted schemes by third-party marketing groups. Some groups even referenced the ERC as a business stimulus payment or a grant.

Now, the IRS plans to deny tens of thousands of improper or high-risk ERC claims due to errors or signs of ineligibility in an effort to protect taxpayers and small businesses. The IRS concluded a review that analyzed data to assess over one million ERC claims that represented more than $86 billion filed as a result of the aggressive marketing schemes in the last year. During the review, the IRS determined that between 10% and 20% of claims are considered high-risk, which means the claims show clear signs of being erroneous and fall outside of the credit guidelines previously established. It was also estimated that between 60% and 70% of claims show an unacceptable level of risk, meaning that the IRS will be performing additional testing and analysis to gather more information to process valid claims and defend against improper claims. The review also indicated that between 10% and 20% of the ERC claims show low-risk and no eligibility warning signs, so the IRS will begin processing more of those claims.

The goal of the IRS is to use information obtained from the review to deny improper claims while also assisting in issuing payments to taxpayers who do not have any potential concerns or red flags associated with their claims. The IRS indicated that the ERC is one of the more complex credits for taxpayers, and requests patience as they work through the process of getting truly eligible taxpayers their money. However, the IRS highlighted those payments will go out at a much slower pace than during the pandemic due to the increased scrutiny.

For taxpayers still waiting on previous ERC claims, no additional action is required . The IRS will notify taxpayers if they need additional information or with further notification. Regarding further information about the timing of specific refund claims, the IRS urges taxpayers not to call as additional information is usually not available during processing.

In light of the large number of claims that have been flagged as questionable by the recent review, the IRS is offering the special ERC Withdrawal Program for unprocessed claims to consider in order to avoid further compliance issues. The IRS is urging businesses to pursue the claim withdrawal process as soon as possible if the businesses have not received refund checks yet. In addition, any businesses that have received, but not yet deposited, a refund check can also use the withdrawal process and return the check. Once the check is returned, the claim will be treated as though it was never filed, and no interest or penalties will apply for an inaccurate claim.

If a taxpayer is found to be non-compliant or to have made a fraudulent ERC claim, there could be a criminal investigation. As of May 31, 2024, there have been 450 criminal cases initiated against potentially fraudulent claims totaling nearly $7 billion. To date, 36 of these investigations have resulted in federal charges, including 16 investigations that lead to convictions. The IRS currently has thousands of ERC claims under audit, so the number of criminal investigations is likely to increase in the future as more fraudulent claims are uncovered.

Additionally, the IRS is in the process of obtaining information relating to abusive tax promoters and preparers who inappropriately promoted the ability to claim the ERC. The IRS has received several referrals from sources regarding these third-party promoters and will continue to go after them for civil and criminal penalties.

While certain third-party promoters were telling taxpayers that every employer was eligible for the ERC as part of their marketing campaigns, it is important that employers work with a trusted tax professional in determining eligibility for the credit. The same advice applies to taxpayers who were misled by third-party promoters.

Contributing Author: Samuel M. Lyon, CPA, is a tax partner at Dannible & McKee, LLP with over nine years of experience in taxation and planning for individuals and closely-held companies. He is responsible for overseeing tax engagements for a variety of clientele with a focus on architecture and engineering, professional services, multi-state corporations and high net worth individuals. Sam is also involved in the firm’s business valuation and succession planning services. For more information on this topic, you may contact Sam at slyon@dmcpas.com or (315) 472-9127.