IRS Recovers Millions in Improperly Distributed Funds through ERC Audit Programs and Voluntary Disclosure

Efforts to Recover Improperly Distributed Funds Under Employee Retention Credit

The Employee Retention Credit (ERC) was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help businesses retain employees during pandemic-related shutdowns. However, due to its complex eligibility rules, the credit was exploited by scammers, resulting in widespread abuse.

In response to this issue, the IRS has been working on initiatives to recover funds that were improperly distributed under the ERC. These efforts include a voluntary disclosure program that ended on March 22, which allowed small businesses to return money they received in error and keep 20% of it. Over 500 taxpayers participated in this program, contributing $225 million, with an additional 800 submissions still in process.

In addition to the voluntary disclosure program, an ongoing program has led to 1,800 businesses withdrawing $251 million in unprocessed claims. The IRS has also conducted audits of more than 12,000 businesses with over 22,000 improper claims, resulting in assessments of $572 million. These initiatives have helped uncover widespread abuse of the ERC that has harmed many small businesses.

IRS Commissioner Danny Werfel expressed concern about this issue but also stated that the results of these initiatives have been promising in helping misled businesses. The IRS had stopped processing new claims in September but plans to resume processing in the spring. At the same time, $3 billion in claims are currently under review by IRS Criminal Investigation as part of the efforts to address fraud and abuse related to the ERC.