IRS Cracks Down on Improper Pandemic-Era Tax Credit Claims by Small Businesses
The IRS has sent out 20,000 rejection letters disqualifying small businesses from claiming the Employee Retention Credit (ERC) due to improper filing. This is part of the agency’s expanded effort to combat incorrect or fraudulent claims.
The IRS has taken action against small businesses that improperly filed tax returns claiming the Employee Retention Credit (ERC), a lucrative pandemic-era tax credit. In an effort to combat incorrect or fraudulent claims, the agency sent out 20,000 rejection letters disqualifying these taxpayers from claiming the credit. The letters targeted two types of filers that were ineligible: entities that did not exist and businesses with no paid employees during the claim period. This is the first batch of rejection letters in the IRS’s extended compliance work in this area.
Concerns over ERC pop-up firms and eligibility requirements
The prevalence of incorrect ERC returns, particularly around the basic eligibility requirement, raised concerns for the IRS. Many small businesses were targeted by ERC pop-up firms aggressively marketing the credit, despite being ineligible. The agency’s goal is to address this issue and ensure that only legitimate claims are approved.
IRS’s expanded efforts to uncover suspicious ERC claims
The IRS has been increasing its compliance efforts regarding the ERC due to its concerns. In September, the agency implemented a moratorium on filing for the credit. It then asked small business owners to review pending claims and voluntarily withdraw any suspicious ones in October. The current wave of rejection letters to unqualified businesses is part of the IRS’s overall compliance strategy to address this issue.
The financial stakes involved
The IRS’s commitment to combating ERC fraud is driven by the significant payments made to businesses. Since 2020, the agency has received nearly 3.6 million ERC returns, with over 600,000 applications in the pipeline totaling $230 billion in refunds paid. The outstanding applications are estimated to be worth another $90 billion to $100 billion. The 20,000 rejection letters sent out have an estimated total value of $2 billion to $10 billion in applied credits.
ERC-related fraud and investigations
The IRS has identified ERC-related fraud amounting to approximately $3.4 billion and has initiated 252 investigations involving another $2.8 billion in potential scams as of July. The agency is likely building criminal cases against ERC internet companies that have filed numerous ineligible claims. However, clawing back ineligible refunds that have already been paid out poses a challenge for the IRS.
Withdrawal program and warnings to taxpayers
The IRS has created a withdrawal program for taxpayers to request and withdraw any claims. This option is available for filers who have applications in progress but have not received a refund, as well as for filers who have received a refund but have not deposited it yet. The IRS has explicitly warned taxpayers about ERC mills, internet pop-up shops without prior CPA or accounting experience, that aggressively push small business owners to claim the credit.
Conclusion:
The IRS’s action against small businesses improperly claiming the Employee Retention Credit demonstrates its commitment to combatting incorrect or fraudulent tax credit claims. By sending out rejection letters and increasing compliance efforts, the agency aims to ensure that only eligible businesses receive the credit. The financial stakes involved and the prevalence of ERC-related fraud highlight the importance of diligent oversight and enforcement. Small businesses should be cautious of ERC mills and seek professional advice to ensure compliance with IRS regulations.