The Employee Retention Credit (ERC) was initially intended to help businesses retain their employees during pandemic-related shutdowns. However, its complex eligibility rules made it a prime target for fraudsters. Scammers took advantage of this by charging small businesses a fee to assist with ERC applications, even if the businesses did not qualify for the credit.
In response to this issue, the IRS launched several initiatives to recover improperly distributed funds under the ERC. One of these initiatives was a voluntary disclosure program that allowed small businesses to return any money they received in error and keep 20% of it. Over 500 taxpayers participated in this program before it ended on March 22, with another 800 submissions still being processed. In addition, over 1,800 businesses withdrew $251 million worth of unprocessed claims through an ongoing program.
The IRS also conducted audits on more than 12,000 businesses that filed over 22,000 improper claims, resulting in $572 million in assessments. IRS Commissioner Danny Werfel expressed concern over the widespread abuse of the ERC claims that have harmed small businesses. In response to this issue, the IRS stopped processing new claims in September but plans to resume processing in the spring with an additional $3 billion in claims under review by the IRS Criminal Investigation.
