IRS Commissioner Danny Werfel directed an immediate halt to the processing of new claims for a pandemic-era small business tax break, aiming to shield filers from a wave of dubious claims.
Crafted to aid small businesses during the COVID-19 pandemic, the Employee Retention Credit (ERC) offers substantial per-employee benefits. Unscrupulous specialist firms have proliferated, making false eligibility claims for this intricate tax break.
These firms have misled businesses, capitalizing on the ERC’s complexity.
Halting New ERC Claims to Counter Exploitation
Speaking to reporters in a press call, Werfel expressed concern about the program’s exploitation by aggressive promoters.
Warfel emphasized that the program’s original intent was not to serve as a lucrative opportunity for promoters. Such actions, he added, were impeding the IRS’s ability to efficiently handle ERC and other taxpayer-related matters.
New ERC claims will remain on hold until at least the conclusion of 2023. Processing times for existing claims may extend from the usual 90 days to 180 days or more.
Cracking Down on Fraudulent Claims
Werfel voiced growing concern within the IRS regarding honest small business owners falling victim to unscrupulous scammers. He emphasized that the influx of suspicious claims had reached a point where it could no longer be tolerated.
The IRS has amassed around 3.6 million claims during the program, with an existing backlog of over 600,000 claims. Most of these claims flooded in within the past 90 days.
By July 1, 2023, the IRS criminal investigation division had launched 252 inquiries into potentially fraudulent ERC claims totaling over $2.8 billion.
Among these investigations, 15 have led to federal charges, with six resulting in convictions, as disclosed by Werfel.
Werfel highlighted the IRS’s proactive efforts in addressing fraudulent claims related to the Employee Retention Credit. He urged businesses to consult a reliable tax expert rather than a refund-seeking promoter.
The emphasis was on seeking guidance from trusted tax professionals. The IRS is developing a resolution plan for small businesses that may have erroneously obtained a refund.
Navigating Amidst Scams
During the Covid-19 pandemic, the employee retention credit (ERS) was established to support small businesses. There is still an opportunity to adjust tax returns and claim this credit, which can be as much as $5,000 per employee for the year 2020 and up to $28,000 per employee for 2021.
However, this opportunity has led to a surge in specialist firms making false claims that they can help business owners qualify for this complex tax benefit. The IRS warned business owners in October, cautioning them about “third parties” promoting the employee retention credit. Recently, this issue has been included in the IRS’s annual list of the Dirty Dozen tax scams for 2023.
As of March 3, the most recent data from the IRS indicates that just over 866,000 companies have claimed and received employee retention credits, totaling over $152.6 billion.
Clearing the Path to ERC Amendments
As of June 2023, there remains a significant backlog of Form 941-Xs, also known as the adjusted employer’s quarterly federal tax return. These forms are essential for businesses to make amendments and claim the employee retention credit for the years 2020 or 2021. The IRS reported that as of June 14, approximately 537,000 Form 941-Xs were awaiting processing.
It’s important to note that there are many valid claims for the employee retention credit within this backlog, which have faced delays while the IRS reviews these submissions. The IRS has stated on its website that it is actively addressing this backlog at two specific locations, staffed with trained personnel, to expedite the review of potential COVID-19 credits.
IRS Penalties for Mistaken ERS Claims
Debra Estrem explained that if you have mistakenly received the employee retention credit, there’s a potential IRS penalty to be aware of. He is managing director of private wealth controversy at Deloitte Tax and has prior experience at the IRS Office of the Chief Counsel.
In such a situation, you could face what’s known as the “erroneous claim for refund or credit penalty.” This penalty generally amounts to 20% of the excessive amount that was incorrectly claimed. The specific type of penalty imposed hinges on whether the mistake occurred during the initial filing or on an amended return.