IRS: Fewer than 20% of Employee Retention Credit Claims are Legit

Any business owner who paid employee salaries or health benefits during COVID-19 restrictions will be waiting a while longer for a tax credit. The IRS is wading through tens of thousands of what it believes are “suspect” claims.

The Service is continuing a moratorium on Employee Retention Credit (ERC) claims it enacted last September. Anywhere from 10% to 20% of ERC claims are being red-flagged as “highest-risk” for fraud. An IRS internal review “involved months of digitizing information and analyzing data since last September to assess a group of one million ERC claims representing more than $86 billion filed amid [an] aggressive marketing [push in 2022 and 2023],” says IRS commissioner Danny Werfel.

IRS says it’s now focusing on the 10%-20% of “low-risk” claims filed by small business owners forced to wait. Roughly 60% to 70% of ERC claims will be getting the slow-walk treatment because they pose an “unacceptable” level or risk. IRS expects to start paying out refunds to low-risk filers by mid-summer.

ERC claim filers don’t need to do anything in the meantime. IRS advises claimants to wait and hear from them and not to bother calling any IRS hotlines because up-to-date info isn’t available yet.

Firms Swindled by Employee Retention Credit Scam Artists

Many companies received advertisements and direct solicitations from third parties offering ERC assistance. Surprise surprise, nearly all of them were scam artists typically asking for up-front fees from potential claimants. Many of the marketing attempts were made by foreign actors attempting to loot the treasury.

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is investigating hundreds of cases involving more than $2.8 billion in fraudulent ERC claims. One common tactic: Businesses that obtained a Paycheck Protection Program (PPP) loan through the IRS during the COVID-19 pandemic weren’t permitted to count the wages listed on the PPP loan application when applying for an ERC. Some scammers did so anyway and could be facing federal indictments soon.

Initially the IRS said a business could qualify for an ERC if it experienced a 50% loss in gross receipts in a quarter compared to the same quarter the previous year, dating back to the third quarter of 2021. IRS then modified the qualification to a 20% loss in gross receipts, which made even more employers eligible for a tax credit.