Employee Retention Credit -IRS Stops Processing New Claims – Fraud

The IRS is cracking down on promoters and others who are filing questionable claims for Employee Retention Credit.  For those individuals who have filed potentially false or fraudulent claims or are subject to an IRS examination or investigation, you should seek the advice of competent tax counsel.

On September 14, 2023, the IRS announced that it will no longer process new claims for the Employment Retention Credit (“ERC”) until at least the end of the year.^[1] Although the IRS will continue to process existing ERC claims, the Service has stated that it will increase the expected processing time of each claim from 90 days to 180 days. The IRS has also announced that it plans to “increasingly shift[] its focus to review[ing] these [ERC] claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims.”^[2] The IRS will include a special withdrawal option for taxpayers who have filed ERC claims and now wish to stop them before the IRS has completed processing.^[3] The Service has also announced that it plans to initiate a settlement program for taxpayers who received an improper ERC payment.^[4] The IRS will reveal more details about this settlement program later in the fall.^[5]

The IRS made its announcement following “growing concerns inside the tax agency, from tax professionals as well as media reports that a substantial share of new claims…are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing.”^[6] For instance, in February, two Utah individuals and an LLC that they operated were recently indicted for allegedly defrauding the federal government out of more than $11 million.^[7] The U.S. Attorney’s Office, District of Utah, claims that the accused submitted “…more than one thousand tax forms to the IRS, claiming…false and fraudulent Employee Retention Credit (ERC) and sick and family leave wage credits for clients….”^[8] The indictment states that the accused allegedly charged a fee for preparing these forms (Form 7200 and 941) and that the greater the tax credit these forms claimed, the more the accused charged.^[9] The charges against the accused include conspiracy to defraud the United States, wire fraud and aiding and assisting in filing false tax returns.^[10]

In light of allegations of widespread fraudulent ERC claims, the IRS has also extended the statute of limitations for audits related to some claims. For instance, generally under I.R.C. § 6501 the IRS has three years to audit a return after it is filed.^[11] However, the IRS has five years to audit ERC claims arising during the third quarter of 2021 under I.R.C. § 3134(l).

^[1] IR-2023-169.

^[2] Id.

^[3] Id.

^[4] Id.

^[5] Id.

^[6]  Id.

^[7] United States Attorney’s Office  – Utah Press Release Number: 23-06 available at https://www.justice.gov/usao-ut/pr/utah-county-residents-and-accounting-business-charged-11-million-covid-related-tax-fraud

^[8] Id.

^[9] See, Indictment, U.S. v. Bassett, 2:23-cr-39 (D. Utah) at 4.

^[10] Id.

^[11] This rule is subject to many exceptions which are not the focus of this insight.