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IRS Intensifies Scrutiny of Employee Retention Credit Fraud

S.J. Steinhardt
Published Date:
Jul 27, 2023

After clearing its backlog of Employee Retention Credit (ERC) claims, the IRS is now shifting its efforts to implementing additional procedures to root out fraudulent claims, Commissioner Daniel Werfel told attendees at the IRS Nationwide Tax Forum in Atlanta.

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. Aggressive marketing tactics have duped many into believing that they are eligible for the credit when they are not.

In response, the IRS has increased audit and criminal investigation work on these claims, both on the promoters as well as those businesses filing dubious claims, Werfel said.

"The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining," Werfel told attendees at the forum. "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 tax professionals and taxpayers about ERC scams, and Werfel expressed his concerns that more may be coming, as businesses can legally continue to file claims for the credit until April 15, 2025.

"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," he said. "A terrible scenario is unfolding that hurts everyone involved—except the promoters."

The IRS said that it has trained auditors examining ERC claims that pose the greatest risk, and that the IRS Criminal Investigation division is working to identify fraud and promoters of fraudulent claims.

The IRS urged taxpayers to watch out for such warning signs as:

● Unsolicited calls or advertisements mentioning an "easy application process;"

● Statements that the promoter or company can determine ERC eligibility within minutes;

● Large upfront fees to claim the credit;

● Fees based on a percentage of the refund amount of ERC claimed; This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund;

● Preparers refusing to sign the ERC return being filed by the business, exposing just the taxpayer claiming the credit to risk; and

● Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group's tax situation. In reality, the ERC is a complex credit that requires careful review before applying.

●  Wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay the credit—along with substantial interest and penalties.

The IRS also said that promoters can lure businesses, tax-exempt groups and others into applying for the credit by such ways as aggressive marketing; direct mailing; leaving out key details, such as failure to explain eligibility limits and other tax requirements; and Payroll Protection Program (PPP) participation.

The IRS reminded businesses, tax-exempt groups and others being approached by these promoters that there are simple steps they can take to protect themselves from making an improper ERC. They include working with a trusted tax professional; requesting a detailed worksheet explaining ERC eligibility and the computations used to determine the ERC amount; and not applying unless one believes that one is legitimately qualified for this credit.

Those who want to report ERC abuse can submit Form 14242, Report Suspected Abusive Tax Promotions or Preparers. People should mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers, and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations at the Internal Revenue Service Lead Development Center, Stop MS5040, 24000 Avila Road,Laguna Niguel, Calif. 92677-3405. The fax number is  877-477-9135.

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