IRS criminal investigators crack down on ERC claims

The Internal Revenue Service’s Criminal Investigation unit has been investigating bogus claims for the Employee Retention Credit and educating tax professionals about the problems they can encounter with it.

As of Jan. 31, 2024, IRS CI has initiated 374 investigations involving more than $2.95 billion of potentially fraudulent Employee Retention Credits in tax years 2020, 2021, 2022 and 2023, according to a spokesperson. Eighteen of the 374 investigations have resulted in federal charges to date. Of those 18 cases, 11 investigations have resulted in convictions, six have been sentenced, and the average sentence has been 24 months.

CI special agents are hosting a series of educational sessions aimed specifically at tax professionals about the ERC at IRS CI field offices across the U.S. The sessions are taking place this month as part of a nationwide initiative to ensure tax professionals have the latest information about ERC claims and understand ERC eligibility criteria.

“During the COVID-19 pandemic, tax credits and loans were extended to struggling businesses,” stated IRS CI chief Jim Lee, who announced last week he will be retiring in April. “We’ve seen many of these COVID-relief programs and credits misappropriated — sometimes knowingly and in other instances not. These educational sessions will help tax preparers navigate the complexities of ERC claims to ensure they’re in compliance with U.S. tax laws.”

IRS CI special agents will walk attendees through ERC eligibility criteria, documentation requirements to receive ERC claims, and best practices for compliance and accurate reporting. The events are taking place in 23 U.S. states and the District of Columbia and are specifically targeted at tax professionals who have claimed ERCs for their clients on previous years’ tax returns. Invitations to attend are arriving through the U.S. Postal Service.

Businesses that filed an ERC claim in error may be able to participate in the IRS’s voluntary disclosure program or withdrawal program. The disclosure program is part of a larger effort at the IRS to stop aggressive marketing around the ERC that misled some employers into filing bogus claims. The disclosure program runs through March 22, 2024, and the IRS has added provisions allowing repayment of 80% of the claim received. The withdrawal option allows some employers who have already filed an ERC claim, but haven’t yet gotten a refund, to withdraw their claim.

The IRS recently highlighted seven warning signs of a dubious ERC claim and also offers a frequently asked questions page on the ERC.

Last September, the agency imposed a temporary moratorium on processing ERC claims through the end of the year because it was being inundated by claims from shady promoters that have come to be referred to as “ERC mills.” It began accepting the claims again this year and is again being inundated with thousands of claims per week.

Tax legislation that was approved late last month by the House would halt new ERC claims as of Jan. 31, 2024. However, the bill,  known as the  Tax Relief for American Families and Workers Act, is currently stalled in the Senate and hasn’t yet come up for a vote. Ending the ERC and imposing penalties on promoters would fund much of the $78 billion cost of the tax extenders bill, which would enhance the Child Tax Credit and revive a number of expired business tax breaks.

IRS Commissioner Danny Werfel was asked by Rep. Drew Fergsuon, R-Georgia, about the ERC provisions of the legislation during a House Ways and Means Committee hearing last Thursday.

“The legislation that’s under consideration would prohibit ERC claims from coming in after a date certain,” Werfel replied. “One of the things that impacts our ability to make sure that we’re getting to the eligible claims, among the ineligible, is the size of the inventory … Once we issued the moratorium, the influx of claims dropped in half, but I think we got 17 to 20,000 last week. That inventory is growing, and it’s growing with a lot of ineligibility. Helping us pause the incoming at this point, so we can find those that have submitted that are eligible. We need that help.”