IRS Halts Pandemic-Era Small-Business Tax Break Following ‘Flood’ of Potential Fraud Claims

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The agency believes over $2.8 billion in claims under investigation could potentially be fraudulent and advises businesses to pause filing.

The Internal Revenue Service (IRS) has announced pausing a small-business tax credit program from the pandemic era for the remainder of the year following worries that ineligible claims are being filed.

The Employee Retention Credit (ERC) was instituted during the COVID-19 pandemic to encourage small businesses to retain their employees on payroll. It offered a refundable tax credit for businesses that paid employees while being shut down due to lockdowns and other restrictions. More than three years later, applications for ERC claims continue to pour in at the agency.

Amid “rising concerns about a flood of improper Employee Retention Credit claims,” the IRS announced an immediate moratorium on the program on Sept. 14 that is valid through “at least the end of the year.”

With the moratorium in effect, it would mean that new claims for ERC would not be processed. However, the agency would continue working on previously submitted ERC claims, it said. Processing times may be longer due to fraud concerns.

The moratorium was ordered by IRS Commissioner Danny Werfel due to worries that third parties or “promoters” were aggressively pressuring ineligible businesses to file for ERC claims. Such third parties can charge hefty fees for services, which can go up to 25 percent of the ERC refund.

Even though promoters advertise that ERC claim-submissions as “risk free,” businesses filing such claims face “significant risks” as the agency increases its audit and criminal investigation into the matter.

According to the IRS, any business that improperly files for ERC claims must pay back the received credit together with potential interest and penalties.

“A business or tax-exempt group could find itself in a much worse financial position if it has to pay back the credit than if the credit was never claimed in the first place,” the IRS stated.

The agency has received around 3.6 million ERC claims over the course of the program, which is roughly a fourth of the total number of U.S. businesses that file tax returns annually.

By Naveen Athrappully

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