IRS Intensifies Audits on Employee Retention Credit (ERC) Claims: A Focus on Improper Filings

The Employee Retention Credit (ERC) was established to support businesses during the COVID-19 pandemic by providing refundable tax credits for maintaining employee payrolls. However, the Internal Revenue Service (IRS) has identified a significant number of improper ERC claims, leading to intensified audits and enforcement actions.

Surge in Improper Claims

In recent months, the IRS has observed a substantial increase in ERC claims that do not meet eligibility requirements. Aggressive marketing by some promoters has contributed to businesses submitting erroneous claims, often without a thorough understanding of the program's complexities. This surge has prompted the IRS to take decisive action to protect the integrity of the tax system.

IRS Enforcement Actions

To address the issue of improper ERC claims, the IRS has implemented several measures:

• Disallowance Letters: The IRS has issued approximately 28,000 disallowance letters to businesses with high-risk ERC claims, aiming to prevent up to $5 billion in improper payments.

  
  

• Audits and Investigations: Thousands of audits are currently underway, and the IRS has initiated 460 criminal cases related to fraudulent ERC claims.

  
  

• Voluntary Disclosure Program: The IRS reopened the ERC Voluntary Disclosure Program, allowing businesses to correct improper claims with reduced penalties. This program is available through November 22.

  
  

Warning Signs of Incorrect Claims

The IRS has identified common issues in improper ERC claims, including:

• Claims by essential businesses that continued full operations during the pandemic without a significant decline in gross receipts.

• Misinterpretation of eligibility criteria, leading to claims by businesses that do not qualify.

Businesses are urged to review their ERC claims for these warning signs and consult with trusted tax professionals to ensure compliance.

Steps for Businesses

To navigate the IRS's intensified scrutiny of ERC claims, businesses should:

1. Review Eligibility: Ensure that your business meets the specific criteria for ERC eligibility, including experiencing a significant decline in gross receipts or being subject to a full or partial suspension of operations due to governmental orders during the pandemic.

2. Consult Professionals: Work with qualified tax advisors to assess the validity of your ERC claims and to navigate the complexities of the credit.

3. Consider Voluntary Disclosure: If you suspect that your ERC claim may be improper, participating in the IRS's Voluntary Disclosure Program before the November 22 deadline can mitigate potential penalties.

4. Maintain Documentation: Keep thorough records supporting your ERC claims, including financial statements, government orders affecting operations, and correspondence with tax professionals.

By taking these proactive steps, businesses can ensure compliance with ERC regulations and avoid the risks associated with improper claims.