“It was a lifeline to protect millions of jobs and provide economic support for businesses,” IRS Commissioner Daniel Werfel said Thursday. “But time has passed. And now, more than two years removed from the heart of pandemic economic disruption, we are deeply concerned that this program is not operating as it was intended.”
The agency said it would stop processing new claims for the credit until the end of 2023, if not longer. Even though the law was written to apply narrowly to firms that were hit hard by the pandemic, businesses have filed 3.6 million claims for the ERC — roughly a quarter of the entire number of businesses that file tax returns each year.
ERC claims now require a business to amend its 2020 or 2021 tax return, since the credit existed only for those tax years. But instead of trailing off, applications have accelerated in recent months as new businesses popped up to offer to file the claims on behalf of employers. Some have aggressively promoted their services, using robocalls and other forms of advertising, to convince employers that they are eligible, whether or not they really are. Werfel said 600,000 businesses submitted claims for the credit in the past 90 days alone.
“We should see only a trickle of employee retention claims coming in. Instead we are seeing a tsunami,” Werfel said. “The ads are everywhere. The program has become the centerpiece for unscrupulous marketing that profits from pushing taxpayers to claim credits that they may not be eligible for.”
A spokesman said Thursday that the IRS has paid more than $230 billion to employers who claimed the ERC, far outpacing the original congressional estimate for the total cost of the program.
Criminal investigators are looking into hundreds of the most suspicious claims, for which the IRS paid out $2.8 billion in total, as well as conducting thousands of civil audits, Werfel said. Fifteen cases have resulted in criminal charges, including some that have led to prison sentences.
Applications that firms have already submitted will be processed, Werfel noted, but may take many additional months so the agency can carefully scrutinize their eligibility. The agency will also set up a new process for businesses to withdraw their claims without penalty if they believe they do not actually qualify, along with a settlement program for businesses to voluntarily repay unmerited credits at a favorable rate, instead of waiting to be audited and potentially facing steep penalties.
The ERC only applies to certain businesses, including those that saw a steep decline in revenue or those that were fully or partially shut down by government orders, such as restaurants and theaters. Yet ubiquitous ads promised that any business could get $26,000 for each person it employs — and offered to file the claims free, in exchange for a substantial cut of the refund.
Such extensive fraud should prompt new legislation from Congress, not just a halt to claim processing, said Laurel Blatchford, a Treasury Department official. For example, lawmakers could ban contingency arrangements in which a business files a tax claim free in exchange for a cut of the refund, or they could grant the IRS the authority to regulate all paid tax preparers, including the businesses that file this sort of claim.
Deputy Treasury Secretary Wally Adeyemo sent the leaders of the Senate Finance Committee a letter Thursday calling for legislation to that effect.