IRS to Deny Improper Claims for COVID-19 Tax Credits
The Internal Revenue Service (IRS) has announced its plans to reject billions of dollars worth of improper claims for COVID-19 tax credits. This decision comes after a thorough review by the agency, which confirmed concerns about a significant number of improper claims and shed light on what it considers to be “risky” activity related to the Employee Retention Credit (ERC).
During the review process, IRS agents analyzed over 1 million ERC claims totaling more than $86 billion. Based on this analysis, the agency intends to deny billions of dollars in clearly improper claims and initiate additional efforts to issue payments to eligible taxpayers without any red flags on their claims.
The ERC refundable tax credit, also known as the Employee Retention Tax Credit or ERTC, was established by Congress in March 2020 to assist businesses in retaining employees during government-imposed lockdowns. Eligible employers who paid wages to their employees between March 12, 2020, and January 1, 2022, could avail themselves of this credit. The eligibility criteria and credit amounts varied based on the impact of the pandemic on each business.
However, this program, which is only available to employers and not individual taxpayers, quickly became a target for fraudulent activity, resulting in a surge of fake ERC applications despite the associated penalties. The IRS attributed this rise in false claims to aggressive marketing and promotions that misled many people into filing for the ERC.
To address this issue, the IRS implemented a moratorium last fall on processing claims submitted after September 14, 2023. This allowed sufficient time for the agency to review approximately 1 million claims and determine their authenticity. IRS Commissioner Danny Werfel expressed deep concern over the number of taxpayers who were misled by promoters into thinking they were eligible for substantial payouts when, in reality, they were not.
In an attempt to rectify the situation, the IRS introduced a voluntary disclosure program that enables employers who mistakenly filed for the tax credit to admit their error. In exchange, they would be allowed to keep 20 percent of the credits they received incorrectly.
Upon reviewing the claims, the IRS identified that 10 to 20 percent of them fell into the “highest-risk group.” These claims exhibited clear signs of being erroneous pandemic-era credit claims. The agency plans to reject tens of thousands of these high-risk claims in the coming weeks as they clearly do not adhere to the guidelines set by Congress.
Additionally, 60 to 70 percent of the claims carry an “unacceptable risk” of being improper and will require further evaluation by the IRS. Claims falling into this category will undergo a more thorough review before a final decision is made.
On the other hand, 10 to 20 percent of the ERC claims pose a low risk. These claims exhibit no eligibility warning signs and were submitted before the moratorium imposed last fall. The IRS intends to process more of these claims, with payments likely to begin later this summer. However, the agency emphasizes that these payments will be significantly slower than those issued during the pandemic period due to the increased scrutiny involved.
The moratorium on ERC claims submitted after September 14, 2023, will remain in effect while the IRS continues to unravel the complexities of administering this credit. Commissioner Werfel acknowledges that this is one of the most intricate credits the IRS has dealt with and urges taxpayers to exercise patience during this process. The ultimate goal is to protect taxpayers against improper payouts that overwhelmed the system and ensure that checks are distributed to those who are genuinely eligible.
In conclusion, the IRS’s decision to deny improper claims for COVID-19 tax credits is a significant step towards combating fraud and restoring integrity to the ERC program. By thoroughly reviewing claims and identifying high-risk and low-risk categories, the agency aims to weed out fraudulent applications and ensure that eligible taxpayers receive the assistance they deserve. While the process may be complex and time-consuming, it is crucial to safeguard taxpayer funds and prevent further abuse of the system.
