IRS Orders Immediate Stop to Employee Retention Credit (ERC) Processing

Faced with a wave of fraudulent claims, the Internal Revenue Service (IRS) has ordered an immediate stop to the processing of all claims for the federal Employee Retention Credit (ERC). As a pandemic-era economic relief program, the ERC was only available for the 2020 and 2021 tax years, but until recently, eligible businesses that did not claim the ERC during these tax years could do so retroactively.

According to the IRS, the high volume of ERC fraud is due in large part to “honest small business owners being scammed by unscrupulous actors.” However, even when small business owners fall victim to ERC scams, they can still be held liable for back taxes, interest and penalties. Here, Boston federal tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, explains what business owners in Massachusetts need to know:

IRS CI is Targeting Businesses for ERC Fraud

In addition to putting a moratorium on the processing of new ERC claims, the IRS is also targeting taxpayers who have claimed the credit improperly. While the IRS notes that it is “developing new initiatives to help businesses who found themselves victims of aggressive promoters”—like settlement programs and repayment plans—it is also conducting investigations and pursuing enforcement as warranted. According to the IRS’ News Release, as of July 31, 2023, IRS Criminal Investigation (IRS CI) “has initiated 252 investigations involving over $2.8 billion of potentially fraudulent Employee Retention Credit claims.” These figures are likely to increase significantly over the coming months.

What Business Owners in Massachusetts Need to Know About the ERC

As a business owner in Massachusetts, what does this mean for you? If your business has claimed the ERC, it will be essential to review your business’ federal tax return to confirm its eligibility. You will also need to ensure that your business has claimed the correct credit amount. This is true whether you calculated the credit yourself, relied on your company’s accountant or worked with another third-party service provider.

Improperly claiming the ERC can have serious consequences. While IRS audits can lead to liability for back taxes, interest and penalties, IRS CI investigations can lead to criminal prosecution. When charged with criminal tax fraud, business owners can face fines and prison time. While entrusting your business’s ERC filing to a third-party service provider may provide a defense to criminal culpability, you will need to be able to affirmatively demonstrate that charges are unwarranted.

We have warned about the IRS’ efforts to target ERC fraud previously. We have also covered the criminal charges that have the potential to follow IRS CI investigations. For business owners who have concerns about facing scrutiny, a proactive approach is generally best. But, choosing the right proactive approach is critical, as voluntarily disclosing filing errors to the IRS can trigger criminal prosecution in some cases.

Request an Appointment with Boston Federal Tax Lawyer Kevin E. Thorn

If you need to know more about the IRS' efforts to target ERC fraud, we encourage you to contact us for a confidential consultation. To request an appointment with Boston federal tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 617-692-2989 or inquire online today.