ERC Fraud May Have Cost Taxpayers More Than $2 Trillion According to Federal Watchdog Report

A report from the federal Pandemic Response Accountability Committee (PRAC) estimates that Employee Retention Credit (ERC) fraud may have cost taxpayers more than $2 trillion since 2020. According to the PRAC, flaws in the Internal Revenue Service’s (IRS) processing procedures allowed thousands of fraudulent credit filings to go unnoticed initially. Now, however, the IRS is seeking to hold fraudulent filers accountable—and it is diverting resources from processing new claims to examining previously-filed claims for signs of fraud.

Businesses That Claimed the ERC Are Under the Microscope Heading Into 2024

As Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, this presents concerns for all ERC claimants. Even businesses that properly claimed the ERC may have their returns reviewed as a matter of course—and those that improperly claimed the credit will be at risk for civil or criminal penalties. While the IRS has announced a claim withdrawal program that allows eligible businesses to withdraw their ERC claims without incurring interest or penalties, filing for withdrawal does not guarantee protection if the IRS uncovers evidence of intentional fraud.

The IRS’ Failure to Prevent—and Efforts to Uncover—ERC Fraud

In its report, the PRAC identifies two primary flaws in the IRS’ processing of ERC claims that facilitated widespread fraud under the program. First, the watchdog notes, the IRS did not have a means of determining whether businesses claiming the ERC qualified as “recovery startup businesses” under the American Rescue Plan Act. As the PRAC states, the IRS instead “rel[ied] on a taxpayer’s self-attestation – a practice we’ve reported led to significant fraud in other pandemic relief programs.”

Second, the IRS did not initially screen tax returns to identify potentially fraudulent ERC claims. This led to the eventual discovery of “11,096 suspicious returns indicating potential identity theft for more than $2 trillion in credits claimed.” While the IRS subsequently implemented additional screening procedures, (i) it was already too late to prevent the processing of thousands of fraudulent claims, and (ii) even with these procedures in place, the IRS still processed additional fraudulent claims throughout 2022 and 2023.

Heading into 2024, the IRS has made clear that uncovering and prosecuting ERC fraud is among its top enforcement priorities. Both intentional and unintentional unsubstantiated ERC claims can trigger fraud allegations—with allegations of intentional fraud presenting the risks for criminal prosecution. While some businesses may be able to mitigate their risk by withdrawing their ERC claims, business owners need to ensure that this is their best option before filing; and, if it isn’t their best option, they need to quickly determine what alternatives they have available.

Request a Confidential Consultation with Washington D.C. Tax Lawyer Kevin E. Thorn

If you have concerns about the IRS’ efforts to target ERC fraud—or if you are currently facing scrutiny from the IRS—we encourage you to contact us promptly for more information. To request a confidential consultation with Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 202-349-4033 or tell us how we can contact you online today.