The IRS and its internal watchdog, the National Taxpayer Advocate, are sounding the alarm about bogus Employee Retention Credit (ERC) claims that sabotage tax collection efforts.
The ERC was one of many tax credits facilitated by the IRS to help keep businesses and the economy afloat during the pandemic.
But despite a strong recovery and normalization in many economic indicators, businesses are still claiming roughly 17,000 deductions a week, making it difficult for the IRS to distinguish fraudulent claims from legitimate ones.
“When it comes to ERC claims, the IRS is really caught in the middle,” Erin Collins of the National Taxpayer Advocates Association said in a statement released with the office’s interim report to Congress.
“Paying ERC claims without adequate review could result in tens of billions of dollars in improper payments. Refusing to pay ERC claims or further delaying payment would once again harm the very business for which Congress created the ERC.”
IRS Commissioner Danny Wuerfel said much the same thing to reporters last week, blaming predatory marketing and promotional tactics that push tax credits.
“Last year, promoters stepped up their marketing and bombarded the airwaves with advertising. You could hardly turn on the TV or radio without seeing an ERC advert. The programme has become a gold rush for promoters,” he said.
The ERC, along with other pandemic-era economic relief measures such as Paycheck Protection Program loans, were key factors in the surprisingly strong recovery from the recession of 2020. U.S. employment data has surged in recent days, baffling economists, monetary officials and markets alike after widespread predictions of a recession.
Some economists have predicted that the unemployment rate would need to rise to 10% for inflation to get back on track. Indeed, inflation has mostly fallen to 2% without picking up significantly from its 2022 high of 9%. Consumer Price Index inflation is currently rising at 3.3% annually, while the unemployment rate remains low at 4%.
With the economy no longer in need of pandemic-related stimulus checks, lawmakers are now considering ways to trim some of the era’s most costly legacies.
The troubled ERC has been on lawmakers’ radar for months and was a key cost contributor to a $78 billion tax bill stalled in the Senate, but there is now little chance of it moving forward before the election.
“We’ve heard from whistleblowers that 95% of these new allegations are bordering on fraud. [or] “There was wrongdoing,” Senate Finance Committee Chairman Ron Wyden (D-Ore.) said in January. “I asked the commissioners, ‘What do you think?’ [if] It was right, and he basically said yes.”
Collins also mentioned several other issues the IRS is currently working on for Congress, including the agency’s level of taxpayer service, which she noted varies based on internal and external metrics.
Although the IRS’s internal “service level” measurement recorded 88 percent in an interim progress report, the IRS actually answered less than one-third of all calls.
“88 percent [level of service] “Many observers are under the impression that IRS employees answered 88 percent of taxpayer calls. In fact, IRS employees answered only 31 percent of taxpayer calls,” she said.
During the 2024 filing season, the IRS received 40 million calls, of which IRS employees answered 12.4 million, with average hold wait times ranging from 3 minutes to 21 minutes, according to various internal segments.
Identity theft is also a problem, and Collins said the IRS needs to work quickly to address those issues.
“As of April 2024, the IRS had spent more than 22 months resolving identity theft victim assistance cases and weeks more paying refunds, with a backlog of nearly 500,000 cases,” she noted.
The IRS is in the midst of a major overhaul of its operations as a result of the Inflation Reduction Act of 2022, from hiring new specialized auditors to centralizing analytics and incorporating artificial intelligence.
Of the $45 billion initially earmarked for additional enforcement, 3 percent, or $691 million, has been spent so far, up from 1 percent at the end of December, according to the Treasury Department’s Inspector General for Tax Administration.
In contrast, 43.2 per cent of the Taxpayer Service Fund – which accounts for a much smaller share of the increased allocation and has been criticised by Finance Minister Collins in the past as insufficient – has been spent so far, up from 33.8 per cent at the end of last year.
Republicans have been chipping away at funding increases in the form of regular spending, so far agreeing with Democrats to shrink about a quarter of the $80 billion originally allocated to the agency.
The IRS expects to hire 4,088 auditors this year, up from 495 last year, and plans to hire an additional 7,239 by the end of next year, though those projections could change depending on the outcome of the November election.
“The IRS will more than double audit rates for the wealthiest taxpayers while protecting small businesses and households from additional audit scrutiny, but it will require additional funding,” the IRS said in an update to its Strategic Operating Plan, which it maintains in conjunction with the funding increase.
President Biden has promised not to raise taxes on people making less than $400,000 a year and has vowed to let the Trump tax cuts lapse, but Republicans are preparing to extend key parts of the Trump tax law that are set to expire in 2026 if they can win the White House and majorities in both houses of Congress.
