To combat fraud, IRS steps up ERC claim enforcement

The IRS and Treasury are looking at new ways to fight rampant fraud in employee retention credit (ERC) claims, including possible congressional action to move up the claim filing deadline and stricter oversight of tax preparers, IRS Commissioner Danny Werfel said Tuesday at a special roundtable session of tax professionals in Atlanta.

Werfel stated that, having cleared the backlog of valid ERC claims, the agency is intensifying compliance work and putting in place additional procedures to deal with fraud in the program.

According to Werfel, the IRS has increased audit and criminal investigation work on these claims, looking into both promoters and businesses filing dubious claims. The IRS has trained auditors examining the claims that pose the greatest risk of fraud, and the IRS Criminal Investigation division is identifying promoters of fraudulent claims, he said.

“The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining,” Werfel said. Instead, the IRS is receiving more and more questionable claims, which the IRS is addressing by intensifying its compliance work, he said.

Businesses typically can file claims for the ERC until April 15, 2025. But those extra months are raising concerns for a credit that has generated a staggering amount of misleading marketing, Werfel stated.

“A terrible scenario is unfolding that hurts everyone involved — except the promoters,” he said at the IRS Nationwide Tax Forum. “We will work with Treasury to explore legislative solutions we can share with Congress to help address fraud and error, including potentially putting an earlier ending date for business to claim the credit” and increasing IRS oversight of tax preparers.

Over 2.5 million ERC claims have been filed for the credit, which was available from March 13, 2020, to Dec. 31, 2021. The IRS has cleared most of the backlog, with 99% of claims about three months old as of mid-July, Werfel said. This progress has helped move along refunds to businesses that made legitimate claims, he said.

The ERC was a refundable tax credit for businesses that paid workers during the COVID-19 pandemic while their operations were fully or partially suspended because of a government order or for those that had a significant decline in gross receipts during the eligibility period.

Promoters making the aggressive marketing claims are likely taking clients from tax professionals who are handling ERC claims correctly, Werfel said. The IRS advises businesses to work with a tax professional rather than rely on the word of promoters.

“Hard-working tax professionals who play by the rules see their clients go elsewhere, lured by false promises and wild exaggerations,” Werfel said.

Fraudulent ERC claims made the IRS’s “Dirty Dozen” list this year, and the IRS has issued several additional warnings about the deceptive practice.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.