ERC Fraud May Exceed $2 Trillion According to Federal Pandemic Watchdog

The Pandemic Response Accountability Committee (PRAC), a federal watchdog assigned to examine fraud under the government’s COVID-19 relief programs, has estimated that fraud under the Employee Retention Credit (ERC) could cost U.S. taxpayers in excess of $2 trillion. The PRAC’s report issued late last year has largely flown under the radar, but is now gaining renewed attention as the Internal Revenue Service (IRS) prioritizes ERC fraud enforcement heading into 2024. Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains:

Flaws in ERC Processing Allowed Fraudulent Claims to Go Under the Radar

According to the PRAC, flaws in the screening process are largely to blame for this estimate. Its report states, in part:

“The American Rescue Plan Act extended eligibility for the tax credit to ‘recovery startup businesses’ (RSB). . . . But there’s no way for the IRS to verify if a business is an RSB. Instead, it’s relying on a taxpayer’s self-attestation – a practice we’ve reported led to significant fraud in other pandemic relief programs. . . .

“[Additionally, t]ax returns were not initially screened to identify potentially fraudulent ERCs. The IRS subsequently identified 11,096 suspicious returns indicating potential identity theft for more than $2 trillion in credits claimed.”

Due to the amount of fraudulent taxpayer losses under the ERC, the IRS is now aggressively targeting those who submitted fraudulent claims. It has suspended processing of new ERC filings through at least the end of the year, and it is encouraging business owners to withdraw fraudulent claims—without providing guaranteed protections to those who do so.

Businesses (and Business Owners) that Improperly Claimed the ERC Can Face Steep Penalties

The IRS’ focus on uncovering and prosecuting ERC fraud means that businesses (and business owners) accused of submitting fraudulent claims are at risk for facing steep penalties. This is true even if they submitted fraudulent claims inadvertently—and even if they did so based on the advice of their accountants, promoters or other third parties. While the IRS has recognized that many business owners fell victim to fraudulent ERC promotion schemes, it has also made clear that all filers will be held accountable if they do not take appropriate remedial action.

While its withdrawal program is underway, the IRS is actively targeting ERC claimants in both civil tax audits and criminal tax fraud investigations. Although filing for withdrawal doesn’t guarantee full protection, it is still likely to be the best option for some taxpayers. However, filing for withdrawal can also be risky, and, in some cases, it will already be too late.

Request a Confidential Consultation with Boston Tax Attorney Kevin E. Thorn

If you need to know more about the IRS’ efforts to target ERC fraud in Massachusetts, we encourage you to contact us promptly. To request a confidential consultation with Boston tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 617-692-2989 or tell us how we can reach you online today.