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IPFS News Link • Internal Revenue Service

IRS Reveals Suspicious Signs It Looks For To Flag Incorrect Or Fraudulent Tax Credit Claims

•, by Tom Ozimek

The IRS indicated in a March 20 notice that there are seven suspicious signs of a bad claim for the employee retention credit (ERC), which is a refundable tax credit designed for businesses that continued paying employees during COVID-19 shutdowns.

The reason the agency is now revealing these telltale signs of incorrect or fraudulent ERC claims is because March 22 is the deadline to apply for a voluntary disclosure program that will let employers who filed bad claims avoid penalties and interest.

Earlier, the IRS found that a large number of improper ERC claims were pushed by predatory promoters on unwitting businesses, with an investigation by the IRS Criminal Investigation (IRS-CI) division uncovering more than $2.8 billion of potentially fraudulent ERC claims.

To fight the wave of dubious ERC claims, the IRS said it had sharply increased compliance action through audits and criminal investigations, with more planned in the future.

However, because of the sheer number of wrongly filed ERC claims and the predatory promotions surrounding them, the IRS developed several ways to get taxpayers who incorrectly claimed the credit to pay it back with minimal penalty.

One of these is the voluntary disclosure program, which lets people who filed bad ERC claims come forward to the IRS and, in exchange for being forthcoming, they only have to pay back 80 percent of what they owe.

Another is a special claim withdrawal process, which lets businesses that filed a questionable claim to withdraw it and avoid the risk of getting an illegal refund that could prove costly.

Generally, anyone who improperly claims the ERC must pay it back, possibly with penalties and interest. The IRS has warned that a business or tax-exempt group could find itself in a much worse cash position if it has to pay back a bad claim than if it had never claimed it in the first place.