IRS to Reject Billions of Dollars of Pandemic-Era Tax Credit Claims

The agency is concerned about how many taxpayers ‘have been misled and deluded into thinking they’re eligible for a big payday,’ Commissioner Danny Werfel said.
IRS to Reject Billions of Dollars of Pandemic-Era Tax Credit Claims
The Internal Revenue Service (IRS) building in Washington, on Jan. 4, 2024. (Madalina Vasiliu/The Epoch Times)
Katabella Roberts
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The Internal Revenue Service (IRS) plans to deny billions of dollars worth of improper claims for COVID-19 pandemic-era tax credits, it announced on June 20.

The agency said in a press release that the planned rejections follow a detailed review that confirmed “widespread concerns about a large number of improper claims,” and provided new insight into what it defined as “risky” ERC activity.

During the review process, IRS agents analyzed more than 1 million Employee Retention Credit (ERC) claims representing more than $86 billion.

“We will now use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to help taxpayers without any red flags on their claims,” IRS Commissioner Danny Werfel said.

The ERC refundable tax credit, also called the Employee Retention Tax Credit or ERTC, was created by Congress in March 2020 amid the COVID-19 pandemic and was meant to help businesses retain employees during government-imposed lockdowns.

The credit is available to eligible employers that paid wages to some or all employees after March 12, 2020, and before January 1, 2022, although eligibility and credit amounts vary depending on when the business was impacted.

IRS Asks Employers to Voluntarily Correct False Claims

However, the program—which is available only to employers, and not individual taxpayers—quickly became a magnet for fraud and the number of fake ERC applications soared, despite the risk of penalties.

According to the IRS, aggressive marketing and promotions last year led to many people being “misled” into filing for the ERC.

As a result of the flood of claims, the agency announced a moratorium last fall on processing claims submitted after September 14, 2023, to allow time to study around 1 million claims and determine how many were genuine.

“These complex claims take time, and the IRS remains deeply concerned about how many taxpayers have been misled and deluded by promoters into thinking they’re eligible for a big payday. The reality is many aren’t,” Mr. Werfel said.

The agency has rolled out a voluntary disclosure program allowing employers who wrongly filed for the tax credit to admit to the error, in exchange for keeping 20 percent of the incorrectly received credits.

According to the IRS, agents reviewing claims identified that between 10 percent and 20 percent of them fall into what the agency has determined to be the “highest-risk group.”

Those claims show “clear signs of being erroneous claims for the pandemic-era credit,” the agency said.

Tens of thousands of Claims to Be Rejected

Tens of thousands of those high-risk claims will be denied in the weeks ahead, according to the agency, which noted that the high-risk group “includes filings with warning signals that clearly fall outside the guidelines established by Congress.”

Another 60 percent to 70 percent of the claims show an “unacceptable risk” of being improper and will need to be further evaluated, according to the IRS.

Internal Revenue Service (IRS) Commissioner nominee Daniel Werfel during his nomination hearing in Washington, on Feb. 15, 2023. (Kevin Dietsch/Getty Images)
Internal Revenue Service (IRS) Commissioner nominee Daniel Werfel during his nomination hearing in Washington, on Feb. 15, 2023. (Kevin Dietsch/Getty Images)

Between 10 percent and 20 percent of the ERC claims show a “low risk.” In those cases, where there are no eligibility warning signs and the IRS received the claims before last fall’s moratorium, the agency will begin judiciously processing more of those claims, it said.

The first payments for that group of employers will likely begin later this summer, according to the agency, although it stressed that those payments will “go out at a dramatically slower pace than payments that went out during the pandemic period given the need for increased scrutiny.”

In the meantime, the moratorium on ERC claims submitted after Sept. 14, 2023, will continue.

“This is one of the most complex credits the IRS has administered, and we continue to ask taxpayers for patience as we unravel this complex process,” Mr. Werfel added. “Ultimately, this period will help us protect taxpayers against improper payouts that flooded the system and get checks to those truly eligible.”

The Associated Press contributed to this report.