IRS Cracks Down on Improper COVID Tax Credit Claims

Flood of Questionable ERC Claims Under Scrutiny as IRS Plans Mass Denials.

The Internal Revenue Service (IRS) is taking action against improper claims for the Employee Retention Credit (ERC), a refundable tax credit meant to support businesses and tax-exempt organizations affected during the COVID-19 pandemic. Though the ERC expired in 2021, recent months have seen a surge in questionable claims, prompting the IRS to halt processing any claims filed after mid-September 2023.

In an effort to curb fraud, the IRS is set to deny tens of thousands of claims deemed high-risk. "Pop-up firms and marketers created a mini-industry that encouraged a flood of claims long after the pandemic’s emergency-phase ended many of which the IRS has said are questionable," reported The Wall Street Journal. The program has already dispensed roughly $230 billion.

Key Points:

  • The GOP-led House voted to end ERC claims after January 31, 2024, aiming to save $80 billion, but the Democrat-led Senate blocked this move.

  • As of mid-May, there were 1.4 million unprocessed ERC claims, with 880,000 filed before the moratorium.

  • IRS Commissioner Danny Werfel expressed concerns about taxpayers being misled into filing ineligible claims, stating, "People may think they are on safe ground, but many are simply not eligible under the law."

In a significant legal battle, Stenson Tamaddon, a Phoenix-based tax advisory firm, has sued the IRS and other government entities. The lawsuit alleges that the IRS violated the Administrative Procedure Act by restricting ERC payouts through "Notice 2021-20," which narrowed eligibility criteria without proper legislative procedures.

CEO Eric Stenson criticized the IRS for overstepping its authority and lacking transparency. "Our goal is to ensure that these businesses receive the support they deserve, this litigation is a last resort," Stenson stated. He emphasized the need for the IRS to provide clear criteria for what constitutes a high-risk claim, advocating for fair treatment of businesses entitled to the ERC.

As the IRS continues its crackdown, businesses and taxpayers should stay informed about their eligibility and consult reliable tax professionals to navigate the complex landscape of pandemic-related tax credits.

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