In a significant development, the Internal Revenue Service (IRS) has announced that its compliance efforts regarding erroneous Employee Retention Credit (ERC) claims have resulted in protecting over $1 billion in revenue since the previous fall. This initiative is part of a broader strategy to counter questionable claims aggressively marketed by some entities, particularly focusing on claims made for the year 2021. 

This announcement underscores the IRS’s commitment to safeguarding small businesses from being misled by false promises and ensuring the integrity of the tax system.

Key Highlights:

• Compliance Milestone: The IRS has surpassed the $1 billion mark in revenue protection from erroneous ERC claims since last fall.
• Voluntary Disclosure Program (VDP): This program, which allowed businesses to voluntarily disclose and repay improper ERCs, has been suspended after March 22, 2024, although the special withdrawal program remains open.
• Intensified Audits and Investigations: The IRS has sent over 12,000 letters to entities regarding improper ERC claims and is conducting extensive audits and criminal investigations.

Detailed Report

Background and Significance of ERC

The Employee Retention Credit (ERC) was introduced as a part of the CARES Act to support businesses during the COVID-19 pandemic by providing a refundable tax credit. 

Initially, the credit was aimed at helping businesses retain employees despite experiencing significant financial hardship due to the pandemic. However, as the program extended into 2021, it became a target for aggressive and, at times, fraudulent marketing, leading to a surge in improper claims.

IRS Commissioner Danny Werfel emphasized the ongoing challenges: “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. 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.”

Key Compliance Initiatives

The IRS has launched several initiatives to curb the misuse of the ERC, focusing on ensuring that businesses do not fall prey to misleading claims. The following are some of the key efforts:

• Processing Moratorium: Since September 14, 2023, the IRS has instituted a moratorium on new ERC claims to address the backlog and scrutinize existing claims more rigorously. This step has been pivotal in preventing further misuse.
• Voluntary Disclosure Program (VDP): The VDP allowed businesses to come forward and repay any improperly claimed ERCs. Through this program, the IRS collected over $225 million from more than 500 taxpayers, with an additional 800 submissions still being processed.
• Claim Withdrawal Process: Businesses with unprocessed ERC claims have the option to withdraw their claims voluntarily. This process has led to 1,800 entities withdrawing claims worth $251 million.

Statistical Overview

Through March 15, 2024, the following statistics highlight the progress of the IRS’s initiatives:

• Voluntary Disclosure Program: Over $225 million collected, with more submissions pending.
• Claim Withdrawals: $251 million withdrawn by 1,800 entities.
• Improper Claims Identified: Over 22,000 claims filed by more than 12,000 entities, resulting in $572 million in assessments.

Impact and Future Plans

The IRS’s aggressive stance on ERC compliance aims to protect businesses from falling victim to fraudulent schemes. The focus on auditing and investigating improper claims ensures that the credit benefits only those who genuinely qualify.

Suspension of the Voluntary Disclosure Program

The IRS has announced the suspension of the VDP after March 22, 2024, although it may reopen depending on legislative changes. The Treasury Department has proposed extending the statute of limitations for ERC claims, which would give the IRS additional time to address fraudulent claims comprehensively.

Currently, the statute of limitations for Tax Year 2020 ERC claims will expire on April 15, 2024. However, compliance activities for 2021 claims will continue as their statute of limitations expires later.

Continued Scrutiny and Audit Efforts

The IRS is intensifying its audit efforts, with thousands of ERC claims already under review. The agency is also investigating promoters who have been suspected of encouraging improper claims. As of February 29, 2024, the IRS Criminal Investigation has initiated over 386 criminal cases involving nearly $3 billion in claims, leading to federal charges in 25 cases, with 12 convictions and six sentences averaging 24 months.

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