The IRS is “Actively Auditing and Conducting Criminal Investigations” Related to the ERC

The Internal Revenue Service (IRS) recently published a News Release advising businesses that have claimed the CARES Act’s Employee Retention Credit (ERC) to carefully review their eligibility. The IRS is also warning businesses to independently assess their eligibility for the ERC when filing their taxes in 2023, noting that “promoters continue pushing ineligible people to file” for the credit when they don’t qualify.

As the IRS states in its News Release:

“The IRS and tax professionals continue to see third parties aggressively promoting . . . ERC schemes . . . . These promoters charge large upfront fees or a fee that is contingent on the amount of the refund [a]nd . . . may not inform taxpayers that wage deductions claimed on the business' federal income tax return must be reduced by the amount of the credit.”

The News Release strongly suggests that the IRS has identified a substantial amount of fraud under the ERC program. Additionally, the News Release quotes Acting Commissioner Doug O'Donnell as stating, “[t]he IRS is actively auditing and conducting criminal investigations related to these false claims.”

Determining Employers’ Eligibility for the Employee Retention Credit

The Employee Retention Credit is a refundable tax credit that was established under the CARES Act at the height of the COVID-19 pandemic. It was intended specifically as a relief measure for businesses that continued to pay their employees despite experiencing the pandemic’s economic impacts. Specifically, to qualify for the ERC, a business must have either:

• Closed or limited its operations during the pandemic based on a government mandate;
• Experienced a  significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021; or,
• Qualified as a recovery startup business during the third or fourth quarter of 2021.

While businesses cannot claim the ERC for wages paid in 2022, the IRS notes that “there continue to be attempts to claim the ERC during the 2023 tax filing season.” Although it is not too late for businesses to claim the ERC if they failed to claim it previously, business owners must ensure that their companies qualify before seeking a refund from the IRS.

What to Do if Your Business Claimed (or May Have Claimed) the ERC Improperly

If you are concerned that your business may have improperly claimed the ERC, what should you do? As the IRS notes, one option is to file an amended return. However, this option can also be risky, and when filing amended returns, taxpayers must ensure that they pay all taxes, interest and penalties owed. Depending on the circumstances involved, other options (such as submitting a voluntary disclosure) may be more suitable. In any case, business owners should take action promptly—before they face scrutiny from the IRS.

Request a Confidential Consultation with Tax Lawyer Kevin E. Thorn in Boston

If you have questions or concerns about claiming the Employee Retention Credit, we invite you to get in touch. Call 617-692-2989, email ket@thornlawgroup.com or contact us online to request a confidential consultation with tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group.