The Treasury Inspector General for Tax Administration (TIGTA)’s Office of Investigations has uncovered a scheme to defraud the IRS of $3.5 billion of potentially improper Employee Retention Credits (ERC) and Sick and Family Leave Credits, CPA Practice Advisor reported.
The scheme involved individuals obtaining individual Employer Identification Numbers (EIN), a unique nine-digit identifier required for tax purposes, and using them to file business tax returns that improperly claimed ERC and Sick and Family Leave Credits. These tax returns frequently showed no signs that a business was active or operating. When TIGTA notified IRS officials, controls were put in place to prevent similar claims.
“This is a great example of how TIGTA can save the federal government and taxpayers billions of dollars,” said Acting Inspector General Heather Hill in the announcement. “We’re helping prevent improper payments before they happen─not paying and chasing them after the fact when they can be more expensive and difficult to recover. I’m proud of the work our Office Investigations did to identify this scheme and alert the IRS so they could implement appropriate fraud controls.”
TIGTA’s Office of Investigations said that it used some of its supplemental Inflation Reduction Act funding that Congress provided to identify these types of complex fraud schemes.
“We’re strategically using our budget to invest in innovative tools and hire experienced employees with sought-after technical skills who are dedicated to protecting taxpayer dollars,” said Trevor Nelson, TIGTA’s deputy inspector general for investigations, in the announcement. “This enables us to quickly identify emerging fraud schemes with potentially significant financial consequences to the federal government.”
The IRS has taken many actions to ERC fraud, including a temporary halt to processing new ERC claims in September 2023. In December 2023, the IRS announced two separate programs: one to enable taxpayers to withdraw their ERC claims, and another to enable taxpayers to pay back the credits without penalties if they believe they improperly applied for, or received, these credits.
Last month, the IRS announced that it has since identified more than $1 billion in questionable ERC claims.
The ERC and Sick and Family Leave Credits were enacted as part of pandemic relief legislation and were designed to encourage businesses to retain employees by either offsetting employment taxes or reimbursing them for the costs of providing employees with paid sick and family leave attributed to COVID-19.