Don't Mess With Taxes

The Employee Retention Credit (ERC) helped many companies keep workers during the difficult COVID-19 pandemic days. But some ERC claims wrong, and the IRS is successfully recouping some of those incorrectly claimed and/or issued funds.

The Internal Revenue Service closed out its Employee Retention Credit (ERC) Voluntary Disclosure Program (VDP) on Friday, March 22, on a high note.

Going into the day, the VDP, which allowed those who got improper ERC payments to pay back most of the money, had produced more than $225 million from 500+ taxpayers. Another 800 submissions were still being processed, and even more being filed at the last minute.

The ERC VDP is just part of IRS efforts to clean up the mess caused by incorrect filings seeking to collect on the COVID-19 era business tax break. Many of the improper filings were submitted by business owners who were encouraged by aggressive promoters who cashed in on the submissions.

In addition, the IRS is allowing those who filed ERC claims to which they weren't entitled to withdraw them if they haven't yet received the money. That ongoing process has so far comes to 1,800 unprocessed ERC claims worth $251 million being taken out of the IRS queue.

Finally, the IRS has determined that more than 12,000 entities filed over 22,000 claims that were improper and resulted in $572 million in assessments.

All these ERC corrective and compliance efforts, with the data complete through March 15, mean that the IRS has recovered and/or prevented issuance of wrong amounts totaling more than $1 billion since the fall.

And that $1 billion plus amount is this weekend's By the Numbers figure.

Ongoing ERC efforts: While the IRS is celebrating this success, it's not stopping. The agency has more ERC actions planned in the months ahead.

"The IRS has made important progress in our compliance efforts protecting more than $1 billion in revenue in just six months, but we remain deeply concerned about widespread abuse involving these claims that have harmed small businesses," said IRS Commissioner Danny Werfel in announcing the latest ERC compliance milestones.

"We are encouraged by the results so far of our initiatives designed to help misled businesses, and the IRS will continue our broader compliance work given the aggressive marketing we've seen with this credit," added Werfel.

Follow-up VDP possible: The IRS' initial program to allow businesses to voluntarily repay improper ERC amounts ended March 22, but that doesn't mean it's completely over.

The IRS says it may reopen the VDP at a future date, depending on whether Congress extends the statute of limitations for ERC claims. The Treasury Department has proposed extending the statute of limitations to give the IRS additional time to address unscrupulous ERC claims.

Currently, the statute of limitations for claims processed for the 2020 tax year will expire on April 15. Assessments on those year's claims will cease after that date.

However, the IRS noted that compliance activities regarding tax year 2021 ERC claims will continue, since that statute does not expire until later.

"The IRS continues to closely monitor discussions in Congress regarding ERC and the need to extend by statute critical tools to protect against improper claims," Werfel said. "In any scenario, the IRS will continue working on a wide range of ERC issues, including the larger dollar 2021 erroneous claims."

If the VDP is reopened at a future date, the terms probably will be the same as the just-completed program. Those who 'fessed up about a wrong ERC were allowed to pay back just 80 percent of the credit they received through Dec. 21, 2023, and didn't face any penalty or interest charges.

Withdrawal option still open: As noted, the IRS continues to allow those who filed incorrect ERC claims but who haven't yet received the tax credit to withdraw the claim.

Many are eligible since the IRS continues its moratorium on processing ERC claims submitted after Sept. 14, 2023. The IRS currently has more than 1 million unprocessed ERC claims.

The IRS hasn't set a specific date to resume processing filings with ERC claims, but it anticipates it will be sometime in the late spring. And when it does resume, the IRS says it will "review the ERC inventory with strong, new measures of scrutiny in place."

With that timeframe, and new tougher exam criteria, in mind, the IRS urges affected businesses to quickly pursue the claim withdrawal process. This option also is available to business taxpayers who received an ERC check, but haven't cashed or deposited it.

The IRS will treat the claim as though the taxpayer never filed it. No interest or penalties will apply.

"We continue to see instances where businesses were misled into filing dubious claims, and we urge people to review the guidelines and take steps to withdraw their claims to avoid future compliance action by the IRS," Werfel said.

ERC claim investigations intensify: Where wrong ERC claims were submitted and the taxpayers didn't take advantage of the VDP, those filers can expect to face additional IRS scrutiny.

The agency has already sent more than 12,000 letters covering tax year 2020 filings to businesses in order to recapture ERC claims that were previously paid. These businesses owe 100 percent of the ERC paid to them, plus penalties and interest dating back to the date the ERC was paid.

The IRS plans to send more letters in coming months to address tax year 2021, which involved larger ERC claims. Congress increased the maximum ERC from $5,000 per employee per year in 2020, to $7,000 per employee for each quarter of the year in 2021.

In addition, the IRS is utilizing other ERC compliance actions, including —

• Audits, in which thousands of ERC claims are currently under examination; and
• Promoter investigations, with the IRS gathering information about suspected abusive tax promoters and preparers improperly promoting the ability to claim the ERC.

The IRS says its Office of Promoter Investigations has received hundreds of referrals from internal and external sources. These leads will be used in civil and criminal enforcement efforts of unscrupulous ERC promoters and tax preparers.

The criminal component is noteworthy. As of Feb. 29, IRS Criminal Investigation had initiated more than 386 criminal cases, with claims worth almost $3 billion.

Twenty-five criminal ERC  investigations have resulted in federal charges, says the IRS, with 12 convictions and six sentencings with an average prison term of two years.

You also might find these blog ERC posts of interest:

• 7 warning signs you filed an incorrect ERC claim
• IRS sends ERC disallowance letters to 20,000+ claimants
• Signs you should consider withdrawing your employee retention tax credit claim

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