The Internal Revenue Service is expanding efforts to crack down on fraud in pandemic-era tax credit programs following an internal analysis that found a large proportion of outstanding claims were improper.
The IRS said Thursday it was extending a freeze on new claims for the Employee Retention Tax Credit, which was created at the height of the pandemic in 2020 and allows companies to collect up to $26,000 per employee. The IRS is also rejecting tens of thousands of claims that it determined were in error.
The original program, which was expanded in 2021, was projected to cost the federal government $55 billion over 10 years. But by last September, the IRS had received nearly 4 million applications and paid out $230 billion in employee retention refunds. Now, 1.4 million applications remain backlogged.
IRS Commissioner Daniel Wuerfel warned that the agency’s enforcement teams are closely scrutinizing applications and investigating illegal tax preparation companies that are encouraging ineligible taxpayers to apply.
“The IRS is deeply concerned about how many taxpayers are being deceived by promoters into thinking they can get rich off of them,” Wurfel said.
The tax break was created as part of the original $2 trillion pandemic relief bill signed into law by President Donald J. Trump, and it offered businesses thousands of dollars per employee if they could prove they had lost revenue due to the coronavirus and were continuing to pay employees.
Wurfel said applicants often apply to non-existent companies or lie about the number of employees on their pay slips.
While the law allows taxpayers to continue claiming the credit through 2025, the IRS suspended the program last fall and stopped processing new claims to scrutinize the backlog of claims and step up audits.
Warfel said the IRS is extending the grace period to prevent more inaccurate claims from being filed. He called on Congress to pass legislation that would allow the IRS to permanently stop accepting claims. The IRS has still been accepting 17,000 tax credit claims per week since September.
“We are concerned that the end of the moratorium will trigger a gold rush by aggressive marketers, leading to a new wave of unjustified claims,” Wurfel said.
The IRS has analyzed 1 million applications in recent months to get a better understanding of how the process is working.
The investigation found that up to 90% of the claims may be fraudulent. 10-20% showed obvious signs of error, and another 60-70% presented an “unacceptable level of risk.” In those cases, the IRS may go back to the claimants for more information and then decide whether to approve or deny the tax credit.
Only 10% to 20% of the roughly $86 billion worth of claims have gone unclaimed, and the IRS will begin processing those claims and paying out more refunds.
Over the past nine months, the IRS has continued to process 28,000 claims, worth $2.2 billion, that it received before the grace period began. The agency has denied an additional 14,000 claims, worth $1.1 billion, during the same period.
Since the IRS began cracking down on fraud related to the program, 450 criminal cases have been opened, with 36 investigations leading to federal charges.
The program’s unexpectedly high costs have contributed to the state’s larger-than-expected annual budget deficit and strained IRS resources as it strives to improve taxpayer service and strengthen its responsiveness.
