The IRS Turns Up The Heat On The Employee Retention Credit

Learn about the IRS’s intensified review of Employee Retention Credit claims, compliance steps for businesses, and how to avoid penalties from improper ERC claims.

Navigating the IRS’s Enhanced Scrutiny on Employee Retention Credit Claims

The IRS has recently intensified its review and enforcement actions regarding the Employee Retention Credit (ERC) due to widespread improper claims. This move is part of a broader effort to ensure compliance and protect taxpayers from fraudulent claims and aggressive marketing tactics by unscrupulous promoters.

Understanding the Current Situation

The IRS’s investigation revealed that a significant number of ERC claims are improper or carry an unacceptable level of risk. Specifically, the IRS found that:

- 10-20% of claims are high-risk and will be denied.

- 60-70% of claims exhibit unacceptable risk levels, necessitating further review.

This heightened scrutiny aims to protect the integrity of the ERC program and ensure that only legitimate claims are honored. The IRS has already denied many claims and is continuing to process low-risk claims with increased compliance measures in place (IRS.gov) (IRS.gov).

The ERC Voluntary Disclosure Program and Withdrawal Option

To aid businesses that may have filed improper claims under pressure from aggressive marketing, the IRS introduced the ERC Voluntary Disclosure Program (VDP). This program allowed taxpayers to correct erroneous claims without incurring additional penalties or interest. As of its deadline on March 22, 2024, the VDP generated over $225 million in corrected claims from more than 500 taxpayers. The IRS has indicated that this program may reopen depending on legislative developments (Kiplinger.com).

Additionally, businesses with pending ERC claims can use the special withdrawal program to retract questionable claims. This process has already resulted in $251 million in potentially false claims being withdrawn, reducing the risk of recapture and associated penalties (Kiplinger.com).

The Impact of Compliance Activities

The IRS has significantly ramped up its compliance activities, including audits and criminal investigations, to address the surge in improper ERC claims. Over 22,000 improper claims have been identified through examinations, leading to $572 million in assessments. The IRS is also pursuing criminal charges against promoters and tax preparers engaged in fraudulent ERC practices (IRS.gov).

For businesses, this means that any improper ERC claims not rectified could result in severe consequences, including recapture of the ERC, penalties, and interest. The IRS has already sent over 12,000 letters to entities recapturing previously paid ERC claims, emphasizing the urgency for businesses to review and correct their claims (IRS.gov).

The Role of Aggressive Marketing

A significant contributor to the surge in improper ERC claims has been aggressive marketing tactics by some promoters. These promoters have often misled businesses into believing they qualify for the ERC without proper assessment of eligibility criteria. The IRS has been vocal about the dangers of such practices and has taken steps to mitigate the impact.

IRS Commissioner Danny Werfel emphasized, “The completion of this review provided the IRS with new insight into risky Employee Retention Credit activity and confirmed widespread concerns about a large number of improper claims.” He added that the IRS will use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to eligible taxpayers (IRS.gov).

As a former IRS investigator, this author has seen this sort of thing before, although never on the scale that happened during the COVID-19 pandemic. Unscrupulous marketers were very convincing, very persistent, and carried a message of a false hope to worried business owners desperate to keep their companies open. Some of the best and brightest business persons I know got taken in by these unscrupulous marketers. That just shows that the promoters pushing these scams were very, very good.

Case Studies and Examples

1. Small Business Misled by Promoters: A small business owner, under pressure from aggressive marketing, filed an ERC claim without understanding the eligibility requirements. Upon IRS review, the claim was found to be improper. The business owner faced potential penalties and interest but was able to use the VDP to correct the claim without incurring additional penalties.

1. Large Corporation’s Compliance Efforts: A large corporation, aware of the complexities of the ERC, engaged a credentialed tax professional to ensure compliance. This proactive approach helped them avoid the pitfalls of improper claims and ensured they received the credits they were entitled to.

Detailed Steps for Businesses

Review Eligibility

Ensure that your business meets the eligibility criteria for the ERC. This may include:

- Experiencing significant declines in gross receipts.

- Being subject to government orders related to COVID-19 that impacted business operations.

- Maintaining proper documentation to support the claim.

- Check the IRS’s Eligibility Checklist for more details.

Correct Erroneous Claims

If your business filed an improper ERC claim that has not yet been processed, consider using the IRS’s withdrawal program or await potential reopening of the VDP to correct the claim without incurring additional penalties.

Consult a Tax Professional

Engaging a credentialed tax resolution specialist can help ensure compliance and avoid potential penalties. These professionals can provide expert guidance on the eligibility requirements and assist in correcting any errors in your claims.

Choose your professional wisely, however. The first thing to check is for credentials. A tax attorney, CPA, or enrolled agent (EA) is admitted to practice before the IRS and has unrestricted rights to represent your interests. Be cautious about returning to the tax company that got you into trouble with the ERC in the first place. Here are seven warning signs about your case that should cause you to think twice.

Stay Informed

Keep abreast of IRS updates and legislative developments that may impact the ERC program. The IRS continues to monitor and adjust its enforcement strategies, and staying informed will help your business remain compliant.

The Legislative Context

The IRS is not working in isolation. Legislative developments play a crucial role in shaping the landscape for ERC claims. Congress has been involved in multiple amendments to the ERC guidelines since its inception. Understanding these changes is vital for businesses to ensure compliance.

For example, the initial ERC provisions under the CARES Act were later expanded by the Consolidated Appropriations Act and the American Rescue Plan Act. These amendments extended the eligibility period and increased the maximum credit available but also introduced additional complexities. As a result, businesses must stay updated on current laws and potential future changes.

The Future of ERC Claims

The IRS has signaled that the scrutiny on ERC claims will continue, with more compliance measures expected. The agency is also working with Congress on potential legislative changes that could impact the ERC program. Businesses should be prepared for ongoing audits and reviews and take steps now to ensure their claims are legitimate.

Conclusion

The IRS’s intensified scrutiny on ERC claims underscores the importance of compliance and due diligence for businesses. By taking proactive steps to review and correct claims, businesses can avoid potential penalties and ensure they receive the credits they are entitled to. Consulting with a credentialed tax professional is highly recommended to navigate this complex landscape and protect your business from the fallout of improper ERC claims.

For more detailed information, refer to the IRS announcements and updates on their website, and consult resources like The Boon Tax Blog for future updates on this topic.

The content on this blog is for informational and educational purposes only and should not be considered as specific tax, legal, or financial advice. Tax matters are highly individualized and depend on various factors unique to each situation. While we strive to provide accurate and timely information, it is essential to remember that the tax code is complex and constantly changing. Before making any decisions or taking action based on the information provided here, please consult with a qualified tax professional who can analyze your specific circumstances and offer tailored advice. The author and publisher disclaim any liability for actions taken based on the content of this blog without seeking professional guidance.