IRS Rejects 20,000 Employee Retention Credit Applications in Major Fraud Investigation

Scam Telemarketers Preying on Small Businesses, Placing Them at Risk of IRS Trouble

If you’re like most small businesses, you have received relentless telemarketing calls over the past two years from firms offering to help you get pandemic-era Employee Retention Credits (ERC). The IRS announced it is sending 20,000 disallowance letters to taxpayers this week, giving them the bad news that their ERC claims have been rejected. 

This is part of a broader crackdown on companies that fraudulently claimed the credits on their own or in collaboration with the dubious firms making all those phone calls offering to help obtain the ERC funds. This first group of letters will cover taxpayers who are ineligible for the ERC either because their entity did not exist or did not have employees for the time period when the credit was claimed. Those are the easiest fraudulent claims to identify, but many more disallowance letters are coming to other ERC claimants.

“With the aggressive marketing we saw with this credit, it’s not surprising that we’re seeing claims that clearly fall outside of the legal requirements,” said IRS Commissioner Danny Werfel. “The action we are taking today is part of an initial set of steps in our compliance work in this area, and more letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received.”

“As we continue our audit and criminal investigation work involving the Employee Retention Credits, we continue to urge people who submitted a claim to review the rules with a trusted tax professional. If they filed an inaccurate claim, we urge them to consider withdrawing their pending claim or use the upcoming disclosure program to repay improper refunds to avoid future action.”

If you submitted a claim based on what you were told by one of the firms that called you to help with your claim, now is the time to check whether you were actually eligible. If you have not yet received any funds and you’re not eligible, you still have time to withdraw your claim to avoid penalties from the IRS. 

The ERC is a refundable tax credit that was designed for businesses that continued paying employees during the COVID-19 pandemic while their business operations were either fully or partially suspended due to a government order or had a significant decline in gross receipts during the eligibility periods.

In July 2023, the IRS said it was shifting its focus to reviewing ERC claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims. The IRS has hundreds of criminal cases being worked, and thousands of ERC claims have been referred for audit.

In September 2023, the IRS suspended ERC processing through at least December 31, 2023, due to the increased fraud concerns that present a high risk to small businesses that are being persuaded to apply for the ERC by scam firms. They are working through existing claims, investigating fraudulent claim processing firms, and setting up guardrails to protect unsuspecting businesses from this abuse. 

Any company or self-employed individual who applied for the ERC credit and was ineligible should retain records regarding the firm they worked with to create the claim, as this could be critically important to defend the company or individual’s actions and also to hold the scam firms accountable.