IRS Enters “Next Stage” of Employee Retention Credit (ERC) Enforcement After Identifying Huge Number of Improper Claims

The Internal Revenue Service (IRS) recently announced that it is entering the “next stage” of Employee Retention Credit (ERC) enforcement after uncovering huge numbers of improper claims. In a June 20, 2024, News Release, the IRS disclosed that it now believes the “vast majority” of ERC claims show signs of being improper, and it is responding accordingly. As Washington D.C. IRS tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, this includes not only denying improper claims but also pursuing civil and criminal penalties as warranted.

The IRS’ Ongoing Response to Widespread ERC Fraud

In its News Release, the IRS highlights its efforts to deny improper ERC claims—noting that while it has processed approximately 28,000 claims worth $2.2 billion over the past several months, it has also denied approximately 14,000 claims with a total worth of $1 billion. However, the IRS is not simply denying improper claims at this stage. It is also actively pursuing enforcement and has reportedly initiated thousands of ERC-related audits, while its Criminal Investigation Division (IRS CI) has initiated hundreds of criminal ERC-related cases over the same time period.

These audits and investigations present substantial risks for targeted taxpayers. Along with facing liability for back taxes (and/or ERC refund reimbursement), interest, and accuracy-related filing penalties, targeted taxpayers may also be at risk for facing criminal charges. Under the Internal Revenue Code’s criminal enforcement provisions, tax fraud carries up to a $100,000 fine ($500,000 for organizations) and five years of federal imprisonment.

Options for ERC Filers that Need to Withdraw or Correct Improper Claims

With these risks in mind, what should ERC filers do if they have concerns? The answer to this question varies from case to case. The IRS’ ERC withdrawal program remains open, and withdrawing a pending improper ERC claim may be the best option in some cases.

But, withdrawing an improper ERC claim does not preclude the possibility of an audit or investigation, and withdrawal isn’t an option in all circumstances. Rather than filing for withdrawal, some taxpayers may need to file amended returns (and voluntarily repay their ERC refunds), and others may need to consider submitting a voluntary disclosure to IRS CI. Submitting a voluntary disclosure involves acknowledging a willful violation of the Internal Revenue Code—so, while this will be the best option in some cases, pursuing this option requires a cautious and strategic approach.

While it may not immediately be clear which option concerned taxpayers should choose, one thing is very clear at this stage: Uncovering and prosecuting ERC fraud is a top IRS priority, and this is not going to change any time soon.

Discuss Your Options with Washington D.C. IRS Tax Lawyer Kevin E. Thorn

If you need to know about your options for resolving an improper ERC claim, we encourage you to contact us promptly for more information. To request a confidential consultation with Washington D.C. IRS tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 202-349-4033 or inquire online today.