Originally part of the 2020 pandemic relief efforts, the ERC was meant to alleviate financial pressures for businesses by subsidizing wages up to $26,000 per employee for retained workers during COVID-19 related downturns.
Despite the program’s intent to distribute $55 billion over 10 years, the IRS discovered widespread abuse, leading to an unplanned payout of $230 billion, far exceeding initial estimates. This discovery has resulted in a continued freeze on new claims and an increase in audits, particularly targeting fraudulent applications and tax preparation schemes that exploit the system. Even with this freeze in place, the IRS still receives more than 17,000 new applications per week.
IRS Commissioner Daniel Werfel expressed concerns about the misuse of the program by entities promoting illegitimate claims, which has not only put a strain on IRS resources but also misdirected taxpayer money intended to support genuine business needs during the pandemic. The IRS’s recent internal review revealed that up to 90% of the analyzed claims might be fraudulent, including applications submitted by non-existent businesses or by those that claim to have larger workforces than they really have. This new data on the level of fraud has compelling the agency to extend its moratorium on new claims and call for legislative action to potentially halt new claims permanently, a request Werfel originally made in the fall of 2023.
This situation serves as a critical reminder for businesses about the importance of compliance and the risks of opportunistic fraud in times of crisis. For business owners and managers, especially those navigating through tax obligations and potential benefits like the ERC, the emphasis must always be on ensuring the accuracy and legitimacy of their claims.
As we’ve written before, there are many companies aggressively marketing the idea of free money and businesses need to exercise caution before filing a claim. Thousands of honest business owners have been caught up in these schemes and may now have to face some unpleasant music. (Also, many of these companies promising to “help” owners apply for ERC credits take a percentage of the credit as payment then disappear. This leaves businesses owing the IRS for the full credit if it was indeed filed fraudulently, but also owing the portion used to pay the commission to the company running the scam.)
If you have filed a legitimate ERC claim, don’t expect your money any time soon. This freeze extension puts a hold on processing any claims while the IRS works out which ones are legitimate and which ones are not. There is nothing you can do at this point but wait until this gets worked out.