IRS PANICKING OVER ERC CLAIMS

Agency Concerned that “Aggressive Marketing” Responsible for Bogus Claims 

Congress created the Employee Retention Credit (ERC) as part of the CARES Act of 2020. The CARES Act was one of six pieces of legislation enacted between March 2020 and the end of 2021. Those laws were designed to spend America out of the economic disaster that arose from the government-mandated COVID-19 shut-down orders issued (with few exceptions) throughout the United States.

The ERC is found in Internal Revenue Code § 3134. It was designed to provide an incentive for employers to keep their employees on the payroll, even if they were not working. The ERC is a refundable credit against employment taxes owed by employers. As a refundable credit, employers could actually get more money back from the government in refunds than they paid in employment taxes in the first place.

About $85 billion in federal money was appropriated to fund this credit. To date, about 3.8 million refunds have been issued. In recent months, the IRS has sounded the alarm concerning potentially bogus ERC claims. In July 2023, the IRS issued IR-2023-135, a news release claiming that the IRS was looking more closely at ERC claims. The agency is increasingly concerned that aggressive national marketing by firms guaranteeing refunds for all businesses under the ERC is leading to “businesses filing dubious claims.” In that news release, Commissioner Werfel stated,

The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining. 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.

 What did they think was going to happen? The law allows employers to obtain a credit of up to $7,000 per employee per quarter (capped at $21,000). Refundable credits have always been the bane of our tax system. People wonder out loud why the IRS targets low-income citizens for audits at a high rate. The reason is that low-income citizens are the ones who claim the Earned Income Tax Credit (EITC). This is also a refundable credit, allowing certain low-income citizens to get more money back from the government than they paid in to begin with. The Government Accountability Office has dubbed the EITC a high-risk program due to the level of fraud associated with it.

Interestingly, the IRS does not specifically identify the nature of the ERC fraud in question. However, the gist of the news releases (discussed below) indicates that marketing companies, not tax professionals, are submitting claims on behalf of businesses that don’t qualify for the credit. And whose fault is that? After Congress created code § 3134 in March 2020, the law went through three amendments between then and November of 2021, at which time it was repealed retroactively, except for certain exceptions. This has created what the IRS acknowledges to be a very “complex credit with precise requirements.”

Complexity, however, does not excuse the filing of a deliberately false claim, which constitutes a potential felony offense, and at the very least, carries civil penalties and interest on any required payback. It does, however, explain why taxpayers by the millions are driven into the waiting arms of professional hustlers who take advantage of the complexity of the system and the ignorance of citizens.

In September 2023, the IRS announced an immediate moratorium through at least the end of 2023, on processing ERC claims…

What are the Withdrawal Procedures?

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