The Internal Revenue Service is cracking down on fraudulent Employee Retention Tax Credit claims and will not process any new claims from businesses through at least the end of the year.
Congress created the Employee Retention Credit (ERC) in March 2020 by way of the $2.2 trillion coronavirus stimulus package known as the Cares Act. The credit sought to motivate employers to keep workers on staff during the pandemic as unemployment rates ballooned.
Fast forward more than three years later and the IRS has been flooded with about 3.6 million ERC claims, many of which the agency says were initiated by bad actors.
“The IRS is increasingly alarmed about honest small-business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in,” IRS Commissioner Danny Werfel said in a Thursday statement. “The further we get from the pandemic, the further we see the good intentions of this important program abused.”
Bad actors are contributing to the backlog of ERC claims, which prevents small businesses that actually deserve the credit from receiving their claim in a timely fashion, Werfel added. It could take 90 to 180 days for a business to receive their ERC refund, or even longer if a claim gets audited.
So-called ERC mills and other bad actors are to blame. These entities, which aren’t all unscrupulous, have popped up in the past year, reaching out to business owners to offer their services in helping entrepreneurs obtain an ERC payout. The catch? The firms helping small businesses charge a percentage of the total refund, upwards of 25 percent, and oftentimes target businesses that don’t even qualify for the credit to begin with.
The high fees outlets charge, while unsavory, isn’t the issue here. It’s the fact that they’re going after businesses that may not qualify for the credit. If the IRS determines a company doesn’t qualify for a refund, that business is on the hook to pay back the credit, plus potential fines.
Thousands of ERC claims are now being audited, the IRS announced Thursday, and the tax agency is pursuing hundreds of criminal cases related to improperly pursuing the credit.
Former IRS Commissioner Mark Everson said that the rise of ERC mills is damaging to taxpayers. Even though he says alliantgroup, the Houston-based tax consulting firm where he’s now vice chairman, has screened out thousands of firms that don’t qualify, “other so-called experts have then stepped in and assisted them in securing monies from the government under the flimsiest of justifications.“
“The Employee Retention Credit is a generous and entirely legitimate benefit, but only for those who meet the provisions set in law,” Everson tells Inc. “Business owners should still determine whether they qualify for the ERC by consulting with their trusted CPA.”
So hold onto those tax receipts — if you’re waiting for your refund to be processed or in the case of an audit, you’ll need them.
The Honorable Mark W. Everson was the nation’s 46th Commissioner of Internal Revenue Service serving from 2003 until 2007. Prior to joining the IRS, Everson held Bush administration posts as Deputy Director for Management at the Office of Management and Budget and Controller of the Office of Federal Financial Management. Everson also served in the Reagan administration, holding several positions at the United States Information Agency and the Department of Justice, where his assignments included Deputy Commissioner of the Immigration and Naturalization Service. At the state level, Everson oversaw the Indiana Workforce and Unemployment Insurance Systems under Governor Mitch Daniels.