The Internal Revenue Service announced on Thursday that a review of 1 million claims for the Employee Retention Credit (ERC) totaling $86 billion has revealed that the majority of these claims are at risk of being improper. The ERC was established to assist businesses in retaining employees during the pandemic-related shutdowns, but it has unfortunately become a target for fraudulent activities.
Due to the complex eligibility criteria of the ERC, scammers have been able to exploit the system by offering assistance to small businesses in applying for the credit for a fee, even if they do not meet the requirements. The IRS has identified that approximately 10% to 20% of the 1 million claims exhibit clear signs of being erroneous, with tens of thousands expected to be denied in the coming weeks. Additionally, 60% to 70% of the claims show an unacceptable risk of being improper and will undergo further evaluation.
IRS Commissioner Danny Werfel stated that the completion of this review has provided valuable insights into the risky activity surrounding the Employee Retention Credit. The IRS plans to deny billions of dollars in clearly improper claims and will initiate additional efforts to issue payments to legitimate taxpayers without any red flags on their claims.
Among the reviewed claims, approximately 10% to 20% are deemed to have low risk, and the IRS will begin processing payments for this group, with the first payments expected to commence later this summer. The IRS had ceased processing new claims in September and has confirmed that the moratorium on ERC claims submitted after September 14, 2023, will remain in effect.
Businesses have the option to request the withdrawal of a claim through the IRS if they wish to halt the processing of an ERC claim for any tax period that has not yet been paid. This measure aims to address the concerns raised by the widespread improper claims associated with the Employee Retention Credit.
