IRS says it will deny most claims of pandemic tax credit for employers

IRS says it will deny most claims of pandemic tax credit for employers

The IRS said Thursday that it plans to deny the vast majority of claims for the Employee Retention Credit program, which was meant to help businesses get through the pandemic but has been dogged by suspicions of fraud.

“We’re seeing clear indicators that the vast majority, at least 70 percent of the ERC claims currently awaiting processing, have red flags about their accuracy,” IRS Commissioner Danny Werfel said Thursday. “A lot of these claims simply aren’t valid.”

Congress created the tax credit in March 2020 to help businesses that kept paying employees after being shut down early in the pandemic. Despite narrow guidelines for what businesses could qualify for the credit, applications for the program have surged over the past three years, and the IRS stopped processing new claims in September. The agency will continue that moratorium.

The IRS said Thursday it has investigated 1 million claims worth about $86 billion. The IRS plans to deny between 10 and 20 percent of the claims at greatest risk in the near future and will continue investigating another 60 to 70 percent of claims that show an “unacceptable level of risk,” the agency said.

The tax credit only applied to certain businesses, including those that saw a steep decline in revenue or those that were fully or partially shut down by government orders, such as restaurants and theaters. But the tax credit program has been the target of aggressive marketing tactics, with robocallers and TV ads promising businesses they could receive $26,000 in tax credits for each employee retained. Companies behind the ads offered to file claims in exchange for a payout from the refund.

“You couldn’t turn on the TV or radio without coming across an ERC ad,” Werfel said.

Businesses have filed 3.6 million claims for the ERC since the program’s debut, The Washington Post previously reported. The ERC’s price tag has now ballooned to more than $232 billion, far exceeding Congress’s initial expectations, Werfel said.

Since September, the IRS has successfully processed 28,000 claims worth $2.2 billion and disallowed more than 14,000 claims worth more than $1 billion.

Nearly 5,000 businesses have withdrawn their ERC claims — totaling $531 million — since the IRS launched a withdrawal process last year. Investigators have also initiated 450 criminal cases related to potentially fraudulent charges worth nearly $7 billion. Thirty-six criminal investigations into claims have resulted in federal charges, Werfel said.

Unwanted and fraudulent claims have clogged the IRS’s processing system and extended the wait for small businesses with legitimate claims, Werfel said. Even after setting the moratorium, the IRS has continued to see more than 17,000 claims per week, he added.

Business owners who filed legitimate claims can expect to receive their first payments later this summer, the IRS said. The payments will come at a dramatically slower rate than they did during the pandemic because of the program’s increased scrutiny.

“You’ve set up this kind of perverse incentive structure that has led to way more claims than the IRS or the Congress ever anticipated and has led to some troubling misuse of the credit,” said Andrew Lautz, associate director of economic policy at the Bipartisan Policy Center, a Washington-based think tank. “It may take months, even years, for some businesses to sort this out.”

The ERC program was initially meant to run until April 2025, but the IRS is consulting with Congress about ending it early, Werfel said.

Alex Brill, a senior fellow at the American Enterprise Institute, highlighted the bipartisan support for curtailing the ERC program on Capitol Hill and among federal tax policy experts and urged Congress to act.

“A big responsibility is falling on the IRS to deal with this problem, when, in fact, Congress could be dealing with this problem,” Brill said.

Earlier this year, the U.S. House of Representatives passed a tax bill that would end the ERC and enhance penalties for promoting fraudulent claims in connection to the tax credit. The measure is currently awaiting Senate consideration.