IRS plans new measures to curb Employee Retention Credit fraud

The Internal Revenue Service will be adding extra procedures to deter scammers who have been inundating the agency with bogus claims for the Employee Retention Credit.

IRS Commissioner Danny Werfel discussed the changes Wednesday in Atlanta during one of the IRS’s Nationwide Tax Forums, saying the IRS has now mostly cleared its backlog and can turn its attention to putting in place additional procedures to vet the claims. The IRS has received over 2.5 million claims for the ERC since it was enacted early in the pandemic as a way to incentivize businesses to retain their workers, and the deadline for applying was later extended. He noted that the IRS has made a great deal of progress on processing the claims this year, with 99% of them only about three months old. 

“The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining,” he said. “Instead, we continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, the IRS continues to intensify our compliance work in this area.”

The IRS has repeatedly warned about the heavily advertised promises of money for potential recipients and has trained its auditors to more closely scrutinize ERC claims that seem to show the biggest risk of fraud, while the IRS’s Criminal Investigation division has been working to identify scams and firms that tout fraudulent claims.

To help tax pros and others, the IRS is offering extra legal clarity about the proper rules, and on July 20, released a legal advice memorandum applying the statutory requirements to five different scenarios. The memo pointed out that employers who experience supply chain disruptions qualify for the ERC only if they have needed to suspend their business operations because their suppliers could not provide critical goods or materials due to a government order that caused the supplier to suspend its operations. The guidance clarifies that supply chain disruptions alone don’t qualify an employer for the credit unless they’re due to a government order. Some unscrupulous promoters have been claiming otherwise.

Werfel acknowledged that most legitimate tax practitioners are trying to comply with the rules, but clients are being tempted by aggressive marketing claims and pressuring their preparers.

“Hard-working tax professionals who play by the rules see their clients go elsewhere, lured by false promises and wild exaggerations,” said Werfel. “The resulting number of claims prevents the IRS from doing other priority work. But the biggest risk is being taken by the promoters pushing these schemes and businesses filing these claims. This is an area where we urge caution; those improperly claiming the credit could face follow-up action from the IRS.”

While the period of eligibility for the ERC for businesses is limited, covering only March 13, 2020 through Dec. 31, 2021, businesses can continue to file claims for the credit until April 15, 2025 under current law, meaning the IRS is going to continue to receive the claims, thanks to the aggressive advertising.

“The amount of misleading marketing around this credit is staggering, and it is creating an array of problems for tax professionals and the IRS while adding risk for businesses improperly claiming the credit,” said Werfel. “A terrible scenario is unfolding that hurts everyone involved — except the promoters.”