IRS Prioritizes Fraud Enforcement as It Works Through Backlog of ERC Claims

The IRS had a backlog of approximately 1.4 million Employee Retention Credit (ERC) claims as of May 2024. This was one of several revelations that came to light when the IRS was forced to respond to a lawsuit challenging its moratorium on new ERC filings earlier this year. In its response, the IRS also made clear that it is processing pending claims “slowly and judiciously” in order to identify potentially fraudulent claims that require further scrutiny. This has a variety of implications for business owners who have filed ERC claims—as Virginia tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains:

The IRS is Examining Pending ERC Claims for Signs of Fraud

As the IRS works through its backlog of ERC claims, it is reviewing pending claims for both eligibility and accuracy. Claiming the ERC when a business is ineligible to do so and inaccurately calculating the ERC can both lead to allegations of ERC fraud. While the IRS was primarily focused on processing ERC claims as quickly as possible during the pandemic, it has now shifted its focus to making sure that it does not pay any refunds that businesses are not eligible to receive.

The IRS is Also Re-evaluating Closed ERC Claims

The IRS' prior focus on processing ERC claims as quickly as possible resulted in a substantial number of businesses receiving refunds for which they were ineligible. As a result, in addition to scrutinizing pending ERC claims, the IRS is reevaluating closed ERC claims as well—and these efforts are leading to audits and investigations in many cases. Since the IRS gave businesses the opportunity to repay just 80 percent of their improper refunds and avoid scrutiny under its limited-time ERC Voluntary Disclosure Program, it is showing little leniency to those who those that chose not to voluntarily repay.

Fraudulent ERC Claims Can Expose Businesses (and Their Owners) to Substantial Penalties

Fraudulent ERC claims can expose businesses (and their owners) to substantial penalties. This is true regardless of whether a claim results in a refund. While the IRS is pursuing civil penalties in some cases, it is working with the U.S. Department of Justice (DOJ) to pursue criminal penalties as warranted. In criminal ERC enforcement cases, defendants can face both fines and prison time.

Concerned Business Owners Have Options Available

While filing a fraudulent ERC claim presents substantial risks, concerned business owners have options available. Depending on the circumstances, these options may include withdrawing an invalid ERC claim or submitting a voluntary disclosure, among others. If you have concerns about your business’s ERC claim, we strongly recommend that you discuss your options with a Virginia tax attorney as soon as possible.

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

If you need to know about your options for resolving an invalid ERC claim with the IRS, we invite you to get in touch. To request a confidential consultation with Virginia tax attorney Kevin E. Thorn, please call 703-752-3752 or send us your contact information online today.