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Increasing Fraudulent ERC Claims and the IRS’s New Withdrawal Process by Steven Toscher, Sandra Brown, Evan Davis and Gary Markarian

The IRS has announced that employers who submitted an ERC claim which is still being processed by the IRS can withdraw their claim and avoid the possibility of getting a refund for which they’re ineligible.

The Employee Retention Credit (ERC), sometimes called the Employee Retention Tax Credit, or ERTC, was introduced by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020. The ERC is a refundable tax credit of up to $28,000 per employee for qualifying business and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic and meet all eligibility requirements. The period of eligibility for the credit for affected businesses covers the period between March 13, 2020, and December 31, 2021.

While many businesses legitimately applied for the credit, the IRS “continue[s] to see more and more questionable claims…” (IR-2023-135, July 26, 2023).The IRS believes  these questionable claims arise largely from aggressive and misleading marketing by promoters and tax return preparers who push businesses to apply for the credit. Promoters may make unsolicited calls to businesses, claiming the ERC is simple to claim.  They may lie about eligibility requirements and suggest that there is nothing to lose by applying for the credit. They may also offer to assist with applying for the credit without thoroughly reviewing all the facts to determine a business’s eligibility. And they may request from employers the payment of large upfront fees to claim the credit or even charge fees based on the percentage of the refund of ERC claimed.

In March of 2023, the IRS spotlighted ERC on its Dirty Dozen list of scams – a list compiled annually by that the IRS uses to warn the public of tax-related scams that taxpayers and tax professionals may encounter (IR-2023-49).

On September 14, 2023, the IRS instituted a moratorium on the processing of new ERC claims through the end of 2023. (IR 2023-169). The IRS announced that it would not accept new ERC claims following growing concerns that a substantial share of new claims from the ERC program are ineligible as a result of taxpayers following aggressive and misleading advice from promoters. The IRS emphasized that ERC claims already submitted would continue being processed, but at a slower pace due to the detailed compliance reviews the IRS had implemented.

On October 19, 2023, the IRS announced the details of a special withdrawal process to help those who filed an ERC claim and are concerned about its accuracy. (IR-2023-193). This withdrawal option allows certain employers who filed an ERC claim but have not yet received a refund to withdraw their submission and avoid future repayment, interest, and penalties. The IRS created the withdrawal option to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Claims that are withdrawn will be treated as if they were never filed and the IRS will not impose penalties or interest.

The withdrawal process is limited to ERC claims that have not been paid by the IRS or for businesses that have received a check for payment on their ERC claim but have not yet cashed or deposited the check.

For businesses that are not eligible to use the recently announced withdrawal process, consideration should be given in consultation with an experienced tax counsel whether the filing of a Voluntary Disclosure – a process by which a taxpayer “comes clean” in exchange for a civil penalty – may be appropriate at this time.

It is clear the IRS is focused on combating the filing and processing of fraudulent ERC claims and pursuing those who have obtained payment on ERC claims that it determines to have been erroneous.  That enforcement involves increased examination of ERC Claims, and the IRS Criminal Investigation special agents investigating and pursuing criminal charges in connection with the filing of fraudulent ERC claims.  We are representing a number of clients under investigation for ERC claims, and whenever a scheme ends up on the Dirty Dozen list the IRS prioritizes resources to investigate and prosecute those cases above run-of-the-mill tax cases. 

If you or a client are in the unfortunate position of having applied for what may be an ineligible, or even fraudulent, ERC claim,  then seek advice from an experienced tax counsel now. 

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