IRS Intensifies Efforts Against Employee Retention Credit Fraud

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IRS Intensifies Efforts Against Employee Retention Credit Fraud (1)

The U.S. Internal Revenue Service (IRS) is escalating its campaign against deceptive applications linked to the Employee Retention Credit (ERC), a fiscal relief initiative established to aid businesses impacted by the COVID-19 crisis. The IRS has disseminated numerous advisories and directives to ensure that companies and tax experts are well-versed in the regulations and can sidestep fraudulent practices.

The ERC, a component of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, is a repayable tax credit for firms that maintained employee salaries during pandemic-induced closures or substantial reductions in gross income. Nevertheless, the IRS has reported a concerning rise in third-party consultants advocating for inappropriate ERC applications, resulting in an influx of false claims and regulatory violations.

To address this, the IRS has been proactively enlightening taxpayers about the potential hazards of the ERC. The agency has cautioned about the dangers of assertive and deceptive promotions promising gratuitous funds, frequently amounting to $26,000 per employee, without any initial investment. These promotions often neglect to mention that the fees levied may be substantial and that wage deductions reported on the company’s federal income tax return must be diminished by the credit amount.

Huge Influx of Applications

Despite issuing warnings about these schemes since the previous autumn, the influx of credit applications persists. The IRS has underscored that tax experts are being coerced into making improper credit claims. In response, the IRS has issued guidelines to tax professionals to ensure they fully comprehend their professional duties and the standards necessary to prepare and sign original tax returns, amended returns, or refund claims related to these credits.

The IRS has also advised businesses to be wary of publicized schemes and direct solicitations promising tax savings that appear excessively advantageous. Taxpayers are invariably accountable for the information reported on their tax returns. Inaccurate ERC claims could lead to taxpayers being obligated to repay the credit, in addition to penalties and interest.

Eligibility for ERC

For eligibility to the ERC, employers must have undergone a total or partial halt in operations, as a result of directives from a relevant government body restricting commerce, travel, or group gatherings due to COVID-19 throughout 2020 or the initial three quarters of 2021. They could also be eligible if they experienced a substantial decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or if they were recognized as a recovery startup business for the third or fourth quarters of 2021.

The IRS has been actively auditing and conducting criminal investigations related to these false claims. The agency is even soliciting tips on malicious actors. To report tax-related illegal activities relating to ERC claims, taxpayers can submit a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers, and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations.

The IRS’s heightened scrutiny of ERC claims is a definitive indication that the agency is dedicated to upholding the integrity of the tax system. Companies and tax experts are strongly encouraged to familiarize themselves with the qualifying conditions and limitations of the ERC to avoid possible fines and legal repercussions. As the IRS persists in its crackdown on fraudulent ERC claims, it is increasingly crucial for businesses to ensure they adhere to the rules and regulations surrounding this tax credit. The IRS is also encouraging employers to report instances of fraud and IRS-related phishing attempts to the IRS and Treasury Inspector General for Tax Administration.

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Vignesh Radhakrishnan
Vignesh Radhakrishnan
Sr Business Reporter
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Vignesh is a principal correspondent (data) with India's leading national English daily. He manages a team of three journalists with whom he runs the Data Point section, which appears on the op-ed page five days a week and online. He also runs a data related youtube channel, a data podcast and a data newsletter.

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  1. IRS opens 2023 Dirty Dozen with warning about Employee Retention Credit claims; increased scrutiny follows aggressive promoters making offers too good to be true | Internal Revenue Service. www.irs.gov. Published March 20, 2023. Accessed June 10, 2023. https://www.irs.gov/newsroom/irs-opens-2023-dirty-dozen-with-warning-about-employee-retention-credit-claims-increased-scrutiny-follows-aggressive-promoters-making-offers-too-good-to-be-true
  2. Employee Retention Credit | Internal Revenue Service. www.irs.gov. Accessed June 10, 2023. https://www.irs.gov/coronavirus/employee-retention-credit
  3. Employers warned to beware of third parties promoting improper Employee Retention Credit claims | Internal Revenue Service. www.irs.gov. Published October 19, 2022. Accessed June 10, 2023. https://www.irs.gov/newsroom/employers-warned-to-beware-of-third-parties-promoting-improper-employee-retention-credit-claims
  4. Professional Responsibility and the Employee Retention Credit OPR Resources Circular 230 Tax Professionals.; 2023. Accessed June 10, 2023. https://www.irs.gov/pub/irs-utl/2023-02-professional-responsibility-and-the-employee-retention-credit-R2-508-compliant.pdf
  5. Wood RW. IRS Warns Of Employee Retention Credit Claim Fraud. Forbes. Published March 8, 2023. Accessed June 10, 2023. https://www.forbes.com/sites/robertwood/2023/03/08/irs-warns-of-employee-retention-credit-claim-fraud/?sh=53c9d42d6319
  6. The IRS is “Actively Auditing and Conducting Criminal Investigations” Related to the ERC. www.boston-tax-lawyer.com. Published March 17, 2023. Accessed June 10, 2023. https://www.boston-tax-lawyer.com/blog/the-irs-is-actively-auditing-and-conducting-criminal-investigations-related-to-the-erc/