The Internal Revenue Service announced today that compliance efforts around erroneous Employee Retention Credit (ERC) claims have topped more than $1 billion so far since last fall as work continues on a number of efforts to counter questionable claims pushed by aggressive marketing, including an aggressive push on claims made for 2021.
“The IRS has made important progress in our compliance efforts protecting more than $1 billion in revenue in just six months, but we remain deeply concerned about widespread abuse involving these claims that have harmed small businesses,” said IRS Commissioner Danny Werfel. “We are encouraged by the results so far of our initiatives designed to help misled businesses, and the IRS will continue our broader compliance work given the aggressive marketing we’ve seen with this credit.”
Three IRS ERC initiatives have protected more than $1 billion just since the IRS instituted a processing moratorium on new claims beginning Sept. 14, 2023. An additional $3 billion in claims is being reviewed by IRS Criminal Investigation. Key figures from the three programs show:
- The special ERC Voluntary Disclosure Program (VDP), has yielded more than $225 million from over 500 taxpayers with another 800 submissions still being processed and more being filed at the last minute before the deadline.
- The ongoing claim withdrawal process for those with unprocessed ERC claims has led to 1,800 entities withdrawing $251 million.
- The IRS has determined that more than 12,000 entities filed over 22,000 claims that were improper and resulted in $572 million in assessments. The IRS is continuing this work, and more activity is planned in this – and other areas in the months ahead.
The amount protected by these IRS ERC initiatives will continue to grow as additional voluntary disclosures are processed, additional claims are withdrawn and additional compliance work is completed. The statistics above are through March 15.
These ERC initiatives are working to protect businesses from ERC promoters that shared misleading information or misrepresented eligibility rules and lured businesses to apply for the ERC when they didn’t qualify. The ERC program began as a critical effort to help businesses during the pandemic, but the program later became the target of aggressive marketing well after the pandemic ended. Some promoter groups may have called the credit by another name, such as a grant, business stimulus payment, government relief or other names besides ERC or Employee Retention Tax Credit (ERTC).
ERC VDP suspended after March 22; could potentially reopen at a future date
The IRS announced today it will suspend the VDP after March 22. The IRS may reopen the VDP at a future date depending on whether Congress extends the statute of limitations for ERC claims. The Treasury Department has proposed extending the statute of limitations to give the IRS additional time to address unscrupulous ERC claims.
Currently, the statute of limitations for claims processed for Tax Year 2020 will expire on April 15. Assessments on Tax Year 2020 claims will cease after this date. However, compliance activities regarding Tax Year 2021 ERC claims will continue since that statute does not expire until later.
“The IRS continues to closely monitor discussions in Congress regarding ERC and the need to extend by statute critical tools to protect against improper claims,” Werfel said. “In any scenario, the IRS will continue working on a wide range of ERC issues, including the larger dollar 2021 erroneous claims.”
If the VDP is reopened at a future date, the terms will be no better than the current program, which offers a special 20% discount.
The ERC Voluntary Disclosure Program, available through March 22, 2024, is for employers who need to repay ERCs they received through Dec. 21, 2023, either as a refund or as a credit on a tax return. This option lets a taxpayer repay the incorrect ERC, minus 20%, for any tax period they weren’t eligible for the ERC. Generally, businesses who enter this program don’t have to amend other returns affected by the incorrect ERC and don’t have to repay interest they received from the IRS on an ERC refund.
The IRS anticipates more participants will enter the disclosure program into the final hours, so the more than $225 million in disclosed ERCs will increase.
Special withdrawal program remains open beyond March 22 for those with unprocessed ERC claims
As the IRS continues its moratorium on processing ERC claims submitted after Sept. 14, 2023, businesses will continue to have an option to pull back on any unprocessed claims.
Businesses should quickly pursue the claim withdrawal process if they need to ask the IRS not to process an ERC claim for any tax period that hasn’t been paid yet. Taxpayers who received an ERC check but haven’t cashed or deposited it can also use this process to withdraw the claim and return the check. The IRS will treat the claim as though the taxpayer never filed it. No interest or penalties will apply.
The IRS currently has more than 1 million unprocessed ERC claims, so the claim withdrawal process remains an important option for businesses who may have submitted an improper claim.
“We continue to see instances where businesses were misled into filing dubious claims, and we urge people to review the guidelines and take steps to withdraw their claims to avoid future compliance action by the IRS,” Werfel said.
ERC claim recapture will expand; audits, investigations intensify
The IRS has already sent more than 12,000 letters to entities recapturing the ERC claim that was previously paid. This puts businesses in a position where they owe 100% of the ERC paid to them, plus penalties and interest dating back to the date the ERC was paid.
This initial round of letters covers Tax Year 2020. More letters are planned in coming months to address Tax Year 2021, which involved larger claims. Congress increased the maximum ERC from $5,000 per employee per year in 2020, to $7,000 per employee for each quarter of the year in 2021.
Among the other IRS compliance actions underway:
- Audits: The IRS has thousands of ERC claims currently under audit.
- Promoter investigations: The IRS is gathering information about suspected abusive tax promoters and preparers improperly promoting the ability to claim the ERC. The IRS’s Office of Promoter Investigations has received hundreds of referrals from internal and external sources. The IRS will continue civil and criminal enforcement efforts of these unscrupulous promoters and preparers.
- Criminal investigations: As of Feb. 29, 2024, IRS Criminal Investigation has initiated more than 386 criminal cases, with claims worth almost $3 billion. Twenty-five investigations have resulted in federal charges, with 12 convictions and six sentencings with an average sentence of 24 months.
Processing moratorium on new claims continues into the late spring
On Sept. 14, 2023, amid concerns about aggressive ERC marketing, the IRS announced a moratorium on processing new claims. A specific resumption date hasn’t been determined but, at this point, the IRS anticipates it will be sometime in the late spring.
This pause will help the IRS review the ERC inventory with strong, new measures of scrutiny in place. During the upcoming months, the IRS plans to complete the transcription of amended paper returns with the help of digitalization and deploy new risk analysis strategies to identify additional compliance work.
Deploying these new risk analysis strategies is necessary before the IRS will resume processing of claims submitted after the September 14 moratorium.
In the meantime, the IRS continues to process ERC claims submitted before the moratorium, but with more scrutiny and at a much slower rate than before the agency’s approach changed last year.
Help for businesses that may have been misled on ERC
Some promoters told taxpayers every employer qualifies for ERC. The IRS and the tax professional community emphasize that this is not true. Eligibility depends on specific facts and circumstances. The IRS has dozens of resources to help people learn about and check ERC eligibility and businesses can also consult their trusted tax professional. Key IRS materials include:
- ERC Eligibility Checklist (interactive version and a printable guidePDF) includes cautions about common areas of misinformation and links to facts and examples.
- 7 warning signs ERC claims may be incorrect outlines tactics that unscrupulous promoters have used and why their points are wrong.
- Frequently asked questions about the Employee Retention Credit includes eligibility rules, definitions, examples and more.
SOURCE: IRS Newsroom