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The Employee Retention Credit (ERC) was created to support businesses and their employees during the COVID-19 pandemic, offering tax credits to employers who kept their staff. However, misuse of the system has led to widespread abuse and fraudulent activity, overloading the Internal Revenue Service's (IRS) capacity to process valid claims.

From October 2022, the IRS raised the alarm with six warnings about ERC fraud, escalating to the point of naming it the top tax scam on its annual "Dirty Dozen" list. In response to the increasing misuse and aggressive marketing tactics employed by ERC promoters, such as broadcast advertising and online promises, the IRS recently issued a seventh warning. These promoters are often accused of misleading businesses with false claims about the credit, potentially leaving claimants open to denied claims and repayment demands.

As per the latest data, over 866,326 employers had filed ERC claims exceeding $152.6 billion by March 3. Although the credit ceased in 2021, the IRS is still grappling with a backlog of amended returns. Meanwhile, the Service has bolstered its audit and criminal investigation capabilities to target fraudulent ERC claims.

The IRS Criminal Investigation division had launched 122 investigations into possible fraudulent ERCs, totaling over $1.2 billion, by April 30. Of these, eleven have led to federal charges, with six resulting in convictions and three sentencing, averaging 22 months.

Lenford Smith, owner of CPA SMITH LLC, and tax attorney Lauren-Nikai Harry, both experienced with ERC claims, report a payment backlog for such claims. Harry noted that no qualifying clients from CPA SMITH LLC have yet received their payments. She partly blames this issue on the complex ERC form, which may lead to errors, particularly for small businesses and independent owners.

When correctly claimed, the ERC is a refundable tax credit for businesses that kept their payroll intact during pandemic closures or suffered a significant drop in gross receipts during the eligibility periods. The IRS advises businesses to collaborate with tax professionals to avoid potential ERC abuse, cautioning against taking advice from self-interested promoters.

In a recent development, the IRS has set up a new channel for CPAs and others to anonymously report suspect third-party vendors promoting inappropriate ERC claims. This move has received the endorsement of the American Institute of CPAs (AICPA). Barry Melancon, the CEO of AICPA & CIMA, mentioned that the AICPA has expressed worries about these ERC mills for more than a year. Form 3949-A, Information Referral, is now open for anonymous fraud reporting, including questionable ERC mills.

The team at Talley has dedicated an extensive amount of time to meticulously study the laws, regulations, and FAQs that are consistently updated regarding the ERC and PPP. We are more than prepared to support you throughout this process. Whether you require a swift answer to a brief query or need comprehensive assistance with the application or refund procedure, we are here for you. Do not hesitate to contact us today.


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