According to a report on Aug. 31 by the Treasury Inspector General for Tax Administration, the IRS has identified more than 11,000 suspicious federal returns that claimed more than $2 trillion in credits as of March 10. The report also noted the IRS does not have the means to verify whether a business claiming the credit actually qualifies or to audit employers filing amended returns to claim the credit.

The ERC program aimed to incentivize small and medium sized businesses to keep full-time employees on payroll during the pandemic instead of laying them off as the economy severely contracted and businesses faltered or closed due to consumers staying home or losing their own jobs. The credit is essentially a rebate to businesses that reimburses them for paying employee salaries. It is refundable, meaning that if a taxpayer does not owe any federal tax, they can receive a refund from the IRS. While most taxpayers became ineligible to claim the ERC for wages paid after September 30, 2021, those that qualified as a "recovery startup business" can still claim the credit for wages paid after June 30, 2021, and before January 1, 2022. Fraudulent and inaccurate payments are an issue because a business can file an amended tax return, known as Form 941-X, claiming the credit even though the program has ended. The IRS had a backlog of roughly 207,000 unprocessed amended returns claiming the benefit. 

The IRS is now watching

Bruce Friedland, an IRS spokesman, said in a statement that with any new tax law, the IRS conducts training for examiners on how to examine the issue successfully. To conduct examinations of Employee Retention Credit claims as efficiently as possible, they are training groups of agents on the Employee Retention Credit. He called the benefit an essential source of relief for small businesses in need of assistance, adding that the IRS takes fraudulent claims of pandemic relief funds very seriously. The Joint Committee on Taxation, the nonpartisan scorekeeper of Congress, initially estimated that the ERC program would cost around $55 billion. Expansions of the credit ramped the total up to approximately $85 billion. However, the total cost remains uncertain due to the IRS' backlog of unprocessed returns, some of which claim the credit.

Talley’s professionals have spent literally hundreds of hours reviewing the law, regulations, and FAQs issued on an almost daily basis regarding the ERC and PPP, and we are happy to assist you in the process. We are available to simply answer a quick question or assist in the application and/or refund process.