IRS Efforts to Address Questionable Employee Retention Tax Credit Claims

The Employee Retention Tax Credit (ERTC) was created during the COVID-19 pandemic to help businesses retain employees. The credit program has been subject to misuse, which has led to heightened scrutiny of credit claims from the IRS. Even though the ERTC ended for most employers by the end of the third quarter of 2021, it could still be claimed in amended payroll returns later.

The IRS has observed a significant influx of fraudulent or questionable ERTC claims, facilitated by misleading promotions implying easy access to substantial tax refunds without acknowledging the credit’s stringent eligibility requirements. IRS Commissioner Danny Werfel stressed the intense advertising of the credit, which caused businesses with good intentions to file incorrectly.

In response, the IRS initiated measures targeting potentially fraudulent claims, beginning with a moratorium on processing new ERTC claims submitted after September 14, 2023, through the end of 2023. Additionally, the IRS acknowledges a backlog exceeding $1 billion in ERTC claims, all subject to intensified scrutiny.

The IRS has introduced the following compliance initiatives to assist businesses that filed problematic claims:

1. Voluntary Disclosure Program: This initiative enables businesses to rectify erroneous ERTC claims by voluntarily reimbursing the received amount. Applicants must apply by March 22, 2024, and if accepted, repay only 80% of the credit received. Interest payments and penalties related to the credit amount are waived if the credit is paid in full by the time you return your signed closing agreement to the IRS. Businesses unable to meet the 80% repayment requirement may seek installment agreements on a case-by-case basis, contingent upon the submission of comprehensive financial disclosures.

To qualify, businesses must furnish the IRS with details of individuals or entities providing advisory services to assist with the original claim for the ERTC.

2. Special Withdrawal Program: Businesses with eligibility concerns regarding pending claims that have not been paid yet may request to withdraw them. This program also extends to entities that have received IRS payments for claims but have not yet cashed or deposited refund checks. The IRS reports over $167 million in withdrawn claims as of mid-January.

In addition to these actions, the IRS has sent letters to thousands of taxpayers, telling them that they cannot claim credits because of inconsistent entity existence or employee payroll status. Likewise, recipients of wrong or excessive credits will get notices about how to repay them through normal collection methods.

The Voluntary Disclosure Program necessitates specific application procedures, and similar protocols apply to the withdrawal program. For guidance or inquiries, please reach out to our office.