Diving certificate:

• The IRS is stepping up its review of applications for the pandemic-era Employee Retention Credit and has sent 28,000 denial letters in recent weeks to companies whose incorrect applications have resulted in unjustified payments of up to $5 billion, the agency said.
• To weed out fraudulent or inadequate applications, the IRS stopped processing ERC applications filed after September 14 in September 2023. The agency has initiated thousands of audits and 460 criminal casesIn addition, 50,000 ERC claims have been reviewed and “are being quickly moved into the payment process,” the IRS said.
• The ERC “is one of the most complex tax provisions ever administered by the IRS,” Commissioner Danny Werfel said in a statement Thursday. “It has been a time-consuming process to distinguish valid claims from invalid ones.”

Diving insight:

TThe IRS has suspended review of applications after aggressive and predatory marketing of the loan program increased even after the pandemic subsided. Some originators falsely labeled the loan as a grant, government aid or stimulus package, the IRS said.

The hype has prompted many ineligible companies to apply, making the IRS’s already “resource-intensive credit assessment” even more complicated, Werfel said.

The administrative challenge “was compounded by the fact that companies were flooded with misleading marketing efforts to claim these tax credits. This created a perfect storm that increased the risk of improper payments for taxpayers and the government, while at the same time complicating IRS processing and delaying processing of claims for legitimate companies,” he said.

Congress created the ERC in March 2020 to encourage companies to retain their employees as the pandemic forced widespread closures.

The IRS is aware that it may have made a mistake in denying some of the 28,000 applications, but a partial audit found that more than 90% of the denials were justified, the agency said. The IRS plans to “stay in touch with the tax community and monitor the situation.”

The agency will begin disbursing the 50,000 valid claims in September, with another large block of low-risk claims expected to be processed and disbursed in the fall.

Since July 1, IRS officials have initiated criminal investigations into nearly $7 billion in potentially fraudulent claims, the agency said. Seventeen investigations resulted in convictions and nine in sentences, with the average sentence being 20 months.

The IRS is also investigating fraudulent and abusive advertising by tax advisors and tax professionals based on hundreds of tips from external and internal sources, the agency said.

The ERC is available for employers who paid wages to some or all of their employees despite a closure order between March 12, 2020 and before January 1, 2022. The amount of the credit varies depending on the duration of the business closure.