The IRS has identified about $1 billion in potential savings from erroneous employee retention credit (ERC) claims, with over half of that money coming from enforcement efforts and the rest from the ERC voluntary disclosure program (VDP) and claim withdrawal process, officials said Friday.

Some 12,000 entities filed over 22,000 improper claims, resulting in $572 million in assessments, the IRS said in a news release about the pandemic-era ERC.

In addition, the VDP has yielded more than $225 million from over 500 taxpayers, with another 800 submissions still being processed and more being filed just before Friday's deadline. And 1,800 entities have withdrawn $251 million in claims through the claim withdrawal process for those with unprocessed ERC filings.

"We are encouraged by the results so far of our initiatives designed to help misled businesses, and the IRS will continue our broader compliance work, given the aggressive marketing we've seen with this credit," IRS Commissioner Danny Werfel said in the release.

Meanwhile, IRS Criminal Investigation (CI) is looking into another $3 billion in claims, the agency said.

The numbers, which are accurate as of March 15, will grow as additional voluntary disclosures are processed, additional claims are withdrawn, and additional compliance work is completed, the IRS said.

The ERC was designed for certain businesses to continue paying employees during the COVID-19 pandemic while their operations were either fully or partially suspended due to a government order or had a significant decline in gross receipts during the eligibility periods. It was generally available to eligible businesses from March 31, 2020, to Sept. 30, 2021, and to Dec. 31, 2021, for recovery startup businesses.

On Sept. 14, 2023, the IRS announced a moratorium on processing new claims. A specific resumption date has not been determined, but it could be in the late spring, the IRS said in its news release. The IRS has paid over $1 billion in claims since the moratorium began, IRS officials said.

Voluntary disclosure program

Under the VDP, businesses that received ERC monies through Dec. 21, 2023, could arrange to repay the incorrect ERC, less a 20% discount, for any tax period they were not eligible for the ERC. The deadline for filing for the VDP was Friday, March 22.

The IRS could reopen the program if Congress agrees to extend the statute of limitation for ERC claims, as Treasury has proposed, the release said. The statute of limitation for claims processed for tax year 2020 will expire on April 15. However, compliance activities regarding tax year 2021 ERC claims will continue, the IRS said.

U.S. Deputy Treasury Secretary Wally Adeyemo called on Congress to help the IRS by extending the statute of limitation.

"While the IRS has worked diligently to recover $1 billion and enforcement efforts continue, Congress must act to protect the interests of U.S. taxpayers and honest small businesses and give the IRS the tools it needs to tackle fraud," he said in a statement.

If the VDP is reopened at a future date, the terms will be no better than the current program.

Special withdrawal program

The IRS has over 1 million unprocessed ERC claims that employers can withdraw if they believe the claim was improper. Taxpayers that received an ERC check but have not cashed or deposited it can also use this process to withdraw the claim and return the check. The IRS will treat the claim as though the taxpayer never filed it. No interest or penalties will apply.

Enforcement actions

The IRS has sent more than 12,000 letters to entities, recapturing the ERC claim that was previously paid. These businesses will owe 100% of the ERC paid to them, plus penalties and interest dating back to the date the ERC was paid.

This initial round of letters covers tax year 2020. More letters are planned to address tax year 2021, which involved larger claims. Congress increased the maximum ERC from $5,000 per employee per year in 2020 to $7,000 per employee for each quarter of the year in 2021.

In addition, thousands of ERC claims are under audit. And, as of Feb. 29, CI has initiated over 380 criminal cases with claims worth almost $3 billion. Twenty-five investigations have resulted in federal charges, with 12 convictions and six sentencings, with an average sentence of 24 months. 

Meanwhile, the IRS continues gathering information about suspected abusive ERC tax promoters and preparers and has received hundreds of referrals from internal and external sources. Criminal and civil enforcement efforts continue, the IRS said.

Learn more about ERC eligibility

The AICPA has ERC resources and information for members so they can warn clients of red flags that could indicate that a vendor is dishonest and discourage dealings with ERC mills.

The IRS's frequently asked questions on the ERC include links to additional resources. The IRS has an interactive ERC Eligibility Checklist to use to check potential eligibility for the ERC. It's also available as a printable guide.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.