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The IRS announced Thursday that it will stop processing all new applications from businesses for the Employee Retention Credit. That halted a tax relief program that was intended to prevent layoffs in the early months of the coronavirus pandemic but became a breeding ground for fraud.
Congress enacted the tax credit in March 2020, hoping that a quick infusion of cash to businesses struggling due to the pandemic would prevent them from laying off workers. But more than three years later, loan applications are still pouring in, and the IRS has raised concerns that many of them are unwarranted or even fraudulent.
“It was a lifeline to protect millions of jobs and provide economic support to businesses,” IRS Commissioner Daniel Werfel said Thursday. “But time has passed. And now, more than two years removed from the center of the pandemic economic disruption, we are deeply concerned that this program is not working as intended.”
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The agency said it would stop processing new loan applications until the end of 2023, if not longer. Although the law was written to apply only to companies hit hard by the pandemic, companies have filed 3.6 million applications with the ERC – about a quarter of the total number of companies filing tax returns each year.
For ERC claims, a business must now amend its 2020 or 2021 tax return because the credit only existed for those tax years. But rather than slowing down, the number of claims has accelerated in recent months as new companies emerged offering to file claims on behalf of employers. Some have aggressively promoted their services using robocalls and other forms of advertising to convince employers that they are eligible, whether or not they actually are. Werfel said 600,000 companies applied for the loan in the last 90 days alone.
“We should only see a trickle of employee retention claims. Instead we are experiencing a tsunami,” said Werfel. “Advertising is everywhere. The program has become the centerpiece of unscrupulous marketing that profits from pressuring taxpayers to claim credits to which they may not be entitled.”
A spokesman said Thursday that the IRS has paid more than $230 billion to employers who applied for the ERC, well above Congress’s original estimate of the program’s total cost.
The criminal police are investigating hundreds of the suspects Damage claims for which the IRS paid out a total of $2.8 billion, as well as conducting thousands of civil audits, Werfel said. Fifteen cases resulted in criminal charges, some of which resulted in prison sentences.
Applications that companies have already submitted are being processed, Werfel noted. However, it could take many more months before the agency can carefully examine its eligibility for funding. The agency will also introduce a new process that will allow companies to withdraw their claims without penalty if they believe they actually do not qualify, as well as a settlement program that will allow companies to voluntarily repay unearned loans at a favorable interest rate instead Waiting for an exam and review There may be hefty penalties.
The ERC only applies to certain businesses, including those that have experienced a sharp decline in sales or that have been fully or partially closed due to government orders, such as: B. Restaurants and theaters. But ubiquitous ads promised that any company could receive $26,000 for each person it employed — and offered to file claims for free in exchange for a significant cut of reimbursement.
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Such extensive fraud should lead to new legislation from Congress, not just a halt to claims processing, said Laurel Blatchford, a Treasury Department official. For example, lawmakers could ban contingency arrangements in which a company files a tax claim for free in exchange for a reduction in refunds, or they could give the IRS the authority to regulate all paid tax preparers, including companies that file such a claim.
Deputy Finance Minister Wally Adeyemo sent a letter to Senate Finance Committee chairmen on Thursday calling for related legislation.