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Funding Cuts Won't Slow IRS's Employee Retention Credit Fraud Crackdown

S.J. Steinhardt
Published Date:
Jun 9, 2023

Despite funding reductions resulting from the recent deal to suspend the debt ceiling, the IRS will continue to move ahead with its strategic plan, and to continue to crack down on Employee Retention Credit (ERC) fraud, Deputy Commissioner of Services and Enforcement Douglas O'Donnell told a tax conference at New York University.

Speaking at NYU’s Tax Controversy Forum, O’Donnell spoke about the strategic plan and appealed to tax professionals to help his agency prevent fraudulent claims, Accounting Today reported.

"A $20 billion cut, but there's still $60 billion remaining, and that's $60 billion we did not have a year ago," O'Donnell told the attendees.  "We still have the opportunity to truly transform the agency."

"I've given a couple of interviews just trying to get the word out, but we need to figure out some way, and tax pros can help us with this," O'Donnell said. "These individuals who are being sold this notion that almost anyone can claim this credit by these mills—they are creating a lot of heartache for businesses because when we go out, if they've gotten a refund, we're going to pull it back, and there's going to be penalties and interest associated with it. Those folks that have gotten 25 percent of the refund as a fee for helping them, they're gone. They're not going to represent them. Whatever you can do to help us, we'd appreciate it. You're helping the community more broadly."

He was referring to what the agency called a “barrage” of “aggressive promoters [that] are wildly misrepresenting and exaggerating who can qualify for the credits” in a recent alert.

“These are Johnny-come-latelies, showing up and they’re pushing this product, pushing this activity in a way that is unethical,” O’Donnell told The New York Times last month. “It is drawing businesses into a trap, that they will then be claiming a credit that they are not entitled to.”

The ERC is a refundable tax credit for businesses that continued to pay employees while shut down due to the COVID-19 pandemic or that had significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021.

The IRS has been using data analytics at its Office of Fraud Enforcement and Office of Promoter Investigations to detect various types of fraud, including among promoters of dubious ERC claims, Lia Colbert, commissioner of the Small Business/Self-Employed Division, told the conference attendees. She said that the service is now in the process of deploying more scanning technology thanks to the extra funding it received last year as a result of the Inflation Reduction Act.

James Creech, a senior manager with the tax team at Baker Tilly, told Accounting Today that dealing with inflated expectations for the ERC can pose problems for tax professionals as well.

"The ERC presents multifaceted challenges, and it's one of the things that keeps me awake at night, in large part because the ERC has probably the single largest potential for buyer's remorse from taxpayers that I've ever seen,” he said.

Accounting firm Sikich hosted a program last month for financial clients to provide information on the rules and regulations for the ERC. Fifty-eight percent of the participants polled said they are being approached daily or weekly by ERC providers offering "claim and refund-related services," Sikich tax partner Jim Brandenburg told Accounting Today.

When clients approach him about these calls, he tries to educate them about how the ERC rules work and he advises them to be careful and make sure they do their due diligence. He expects the IRS to increase its enforcement activity in the coming year and into next year.

"At the IRS, they trained a number of their individuals at the end of last year on the ERC," he said. "Some of the agents, I think, were helping out with the regular busy season filing, but my guess is perhaps this summer and into the fall, they will devote more time toward some of the ERC audits."

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