Dive Brief:

• The IRS is ramping up review of claims for the pandemic-period Employee Retention Credit and has mailed 28,000 disallowance letters in recent weeks to businesses whose flawed applications would have prompted as much as $5 billion in unwarranted payments, the agency said.
• The IRS in September 2023, aiming to weed out fraudulent or deficient applications, halted processing of ERC claims submitted after September 14. The agency has initiated thousands of audits and 460 criminal cases. It has also validated 50,000 ERC claims and “is quickly moving them into the pipeline for payment,” the IRS said.
• The ERC “is one of the most complex tax provisions ever administered by the IRS,” Commissioner Danny Werfel said Thursday in a statement. “It has been a time-consuming process to separate valid claims from invalid ones.”

Dive Insight:

The IRS suspended reviewing applications after aggressive and predatory marketing of the credit program increased even after the pandemic began to subside. Some promoters mislabeled the credit as a grant, federal relief or business stimulus, the IRS said.

The hype prompted many ineligible businesses to file claims, complicating what is already “a resource-intensive credit for the IRS to evaluate,” Werfel said.

The administrative challenge “was compounded by misleading marketing flooding businesses to claim these credits, creating a perfect storm that added risk of improper payments for taxpayers and the government while complicating processing for the IRS and slowing claims to legitimate businesses,” he said.

Congress created the ERC in March 2020 to encourage businesses to retain employees as the pandemic forced widespread shutdowns.

The IRS is aware that it may have erred in rejecting some of the 28,000 applications, but a partial review showed that more than 90% of the disallowance notices are warranted, the agency said. The IRS plans to “remain in contact with the tax community and monitor the situation.”

The agency will begin issuing payments for the 50,000 valid claims in September. It expects to add another large block of low-risk claims for processing and payment in the fall.

As of July 1, IRS officials have initiated criminal cases with potential fraudulent claims totaling nearly $7 billion, the agency said. Seventeen investigations have led to convictions and nine sentencings, with an average sentence of 20 months.

The IRS is also investigating fraudulent and abusive promotion by tax preparers and tax specialists based on hundreds of referrals from external and internal sources, the agency said.

The ERC is available to employers that, despite an order to shut down, paid wages to some or all of their employees after March 12, 2020 and before January 1, 2022. Credit amount varies depending on the length of a business’s setback.