According to a recent review of Employee Retention Credit applications submitted to the IRS, the vast majority of claims had either an “unacceptable” or high risk for fraud. Per estimates from the Taxpayer Advocate Service of the IRS, approximately 3.5 million ERC claims were filed as of September 2023. That means roughly 2.45 to 3.15 million claims are potentially fraudulent.
What is the Employee Retention Credit:
Due to the challenges brought about by the COVID-19 pandemic, businesses and tax-exempt organizations were offered relief via the Employee Retention Credit (ERC or ERTC). This was designed to support those who continued paying employees during government-mandated shutdowns or experienced a decline in gross receipts.
Scammers Paradise:
Almost as soon as the IRS announced the ERC, predatory companies began taking advantage of small businesses using aggressive marketing and sales tactics. Unsuspecting businesses began receiving unsolicited calls, emails, texts, flyers and other communications regarding their qualifying for “free” money from the IRS. These deceptive companies claimed they could determine a businesses’ eligibility to enroll within minutes. This, of course, led to taxpayers unknowingly submitting fraudulent applications under the claim that they had “nothing to lose.”
Refund Anticipation Loans:
Some companies went as far as issuing loans to businesses in anticipation of being repaid using funds from the ERC. In many cases, these glorified payday loans were disguised as a gesture of good will. Oftentimes, the businesses were being unknowingly thrown under the bus as they were never eligible for the ERC in the first place.
Why Scammers Did it:
To put it simply, if a business received funds for the ERC, the company that helped them apply would charge an upfront fee of 10-50% of the ERC amount as compensation for their services. In some cases this meant tens of millions of dollars being paid to the unscrupulous return preparers.
* It is important to note that not all companies that assisted taxpayers with their ERC applications were scammers. Many companies submitted applications properly and with due diligence.
The Government’s Response to the IRS's ERC Fraud Problem:
The IRS noticed the surge in unqualified and fraudulent applications. By 2023, millions of applications had been submitted with thousands of new applications rolling in every day. In September of 2023, the IRS announced that it would stop processing any claims as they sorted through the mountain of unprocessed and incorrectly processed applications.
The Covid-19 Fraud Enforcement Task Force:
It goes without saying that the Government does not take fraud lightly. The United States Department of Justice deployed a special task force to combat fraudulent activities committed during the pandemic.
The DOJ’s Attorney General Merrick B. Garland stated:
“Since I established the COVID-19 Fraud Enforcement Task Force three years ago, we
have charged more than 3,500 defendants, seized or forfeited over $1.4 billion in stolen COVID-19 relief funds, and filed more than 400 civil lawsuits resulting in court judgements and settlements.
Repayment of funds:
Taxpayers that received the ERC without being properly qualified may be subject to penalties and interest, requiring them to pay back even more than they were initially given.
Conclusion:
While the ERC was intended to help small businesses in need, it opened the door to a world of scamming, fraud and pain. Thousands of businesses fell victim to ERC scams. For businesses impacted by these unfortunate repercussions, it is recommended that they consult with a tax professional to resolve the unfortunate issues that may have arisen.
Work with LMU:
The tax professionals at LMU Consulting Group work tirelessly for their clients to help them address issues stemming from the ERC. If you believe the LMU team can assist your business, please consider contacting us.