Werfel Updates Congressional Committee on IRS’s Ongoing ERC Fraud Actions

By Debbie Tam

On May 7, 2024, IRS Commissioner Daniel Werfel, during a hearing before the House Committee on Appropriations, discussed the latest efforts in combating ERC fraud.

Combating ERC fraud.

The ERC was made available during the COVID-19 pandemic to encourage businesses to retain workers by offering a refundable tax credit against certain employment taxes equal to a certain percentage of the qualified wages an eligible employer paid to employees after March 12, 2020 and before October 1, 2021, with the exception of recovery startup businesses (see Payroll Guide ¶20,905). Despite the expiration of the credit, taxpayers continued to file ERC claims retroactively by submitting amended employment tax returns (e.g., Form 941-X) due to aggressive marketing campaigns by ERC mills. As a result, the IRS issued a moratorium on processing new ERC claims received on and after September 14, 2023. The IRS has not lifted the pause yet. In addition to the moratorium, the IRS offered the ERC Voluntary Disclosure Program (ERC-VDP) which expired on March 22, 2024, and an ERC withdrawal process.

Werfel reported that during the period of September 2023 through mid-March 2024, the IRS has protected more than $1 billion in invalid ERC claims.  The IRS continues to track down unscrupulous ERC promoters with specially trained auditors. The Criminal Investigations Division is investigating hundreds of cases potentially worth billions in false claims.

ERC withdrawal process.

Taxpayers who filed an ineligible ERC claim and did not receive a refund are permitted to withdraw an incorrectly filed ERC claim through a withdrawal process. Penalties and interest will not be imposed if the ERC claim is withdrawn before it is processed. The IRS continues to offer the ERC withdrawal process. Werfel revealed $251 million were withdrawn in invalid Employee Retention Credit (ERC) claims from a total of 1,800 entities since the process was made available.

ERC-VDP.

The IRS noted the ERC-VDP recovered $225 million, from over 500 taxpayers, in invalid ERC claims. Werfel explained there were still 800 submissions to be processed.

Disallowed ERC claims.

Werfel noted that in December 2023, the IRS notified over 20,000 businesses of disallowed ERC claims. More than 12,000 entities were responsible for over 22,000 claims, resulting in $572 million in assessments.

Continued ERC claim processing.

Werfel assured the Committee that the IRS continues to process ERC claims received prior to the moratorium, but at a slower pace. Particularly, Werfel noted the challenge of reviewing amended employment tax returns since these forms may only be filed by paper. The IRS is developing a scanning process for pre- and post-moratorium paper returns. This process should be available by Spring 2024.