IRS Demands Back 20,000 COVID Payments Over Dubious Claims

The Internal Revenue Service (IRS) initiated a crackdown on dubious Employee Retention Credit (ERC) claims, mailing over 20,000 disallowance letters to taxpayers and entities that did not exist or had no employees during the eligibility period.

Intensifying its scrutiny of ERC claims as part of an expanded effort to safeguard against fraudulent claims, the revenue watchdog said on Wednesday that it identified a significant number of taxpayers who failed to meet the basic criteria for the credit. Starting this week, the IRS said those deemed ineligible will receive Letter 105 C, indicating their claim has been disallowed.

While the IRS said in October that it already has "hundreds of criminal cases being worked," with "thousands" of ERC claims being referred for audit, this group includes entities either not in existence during the eligibility period or without paid employees at that time.

The approach includes a special program for business owners, allowing them to voluntarily withdraw pending claims with the IRS if they think they filed an inaccurate tax return, as well as an upcoming disclosure initiative for business owners to return questionable payments to avoid future action.

The IRS said it is allowing taxpayers to voluntarily withdraw claims and return questionable payments in response to aggressive marketing tactics that have targeted small businesses and other organizations.

Commissioner Danny Werfel expressed concern over those aggressive marketing leading to ineligible claims, saying in a statement that "it's not surprising that we're seeing claims that clearly fall outside of the legal requirements," noting that "more letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received.

"As we continue our audit and criminal investigation work involving the Employee Retention Credits, we continue to urge people who submitted a claim to review the rules with a trusted tax professional," the commissioner said in the statement. "If they filed an inaccurate claim, we urge them to consider withdrawing their pending claim or use the upcoming disclosure program to repay improper refunds to avoid future action."

The IRS, in September, said it placed a moratorium on processing new ERC claims until at least the end of 2023, as the pause is vital to prevent fraud and protect businesses from potential penalties or interest on incorrect claims.

Newsweek reached out to the IRS via email for comment but did not receive a response prior to publication.

What is the ERC?

The ERC program, which was available to eligible employers that paid qualified wages to some or all employees after March 12, 2020, and before January 1, 2022, was introduced as a refundable tax credit under the Coronavirus Aid, Relief, and Economic Security (CARES) Act back in 2020. It was designed to incentivize and assist businesses in maintaining their workforce during the economic disruptions caused by the pandemic.

Initially, for 2020, the ERC allowed eligible employers to claim a credit of 50 percent of qualified wages paid to employees, up to a maximum payout of $5,000 in wages per employee for the entire year. In 2021, the scope of the ERC was expanded with the maximum per employee raised to $21,000.

Combining both years, an eligible employer could claim a maximum of $26,000 per employee ($5,000 for 2020 and $21,000 for 2021).

The expansive nature of the ERC, coupled with evolving eligibility criteria and the high value of potential claims, made it an attractive target for both legitimate businesses seeking relief and for unscrupulous entities looking to exploit the system. According to a Government Accountability Office (GAO) report from last year, employers filed claims for 367,280 ERCs, amounting to an approximate total of $32 billion.

Basic calculation would translate to an average disbursement of about $87,127 per claim. The IRS reported that it received around 3.6 million claims for the credit over the course of the program, which suggests that the total ERC payouts could exceed $300 billion.

To that end, the IRS is now balancing the task of efficiently processing legitimate claims while also cracking down on fraudulent and erroneous applications.

If you're a business owner who was misled into filing an ineligible claim and have not received payment yet, the IRS urges you to process a withdrawal request for any unfulfilled ERC claims, allowing you to avoid future repayment and penalties. Moreover, for those who do not submit a withdrawal request, the IRS said it may request additional information from taxpayers to validate their claims.