IRS Investigates Fraudulent ERC Claims

The Employee Retention Credit (ERC) has become a focal point of controversy, with the IRS identifying a significant number of fraudulent claims. In July 2023, the Department of Justice indicted a tax preparer for allegedly submitting over $124 million in fraudulent ERC claims, highlighting the growing trend of legal actions against preparers for mail and wire fraud alongside tax violations. This surge in fraudulent activity has overwhelmed the IRS, complicating the processing of legitimate claims. As the IRS grapples with the fallout, tax preparers face a dilemma regarding previously submitted ERC claims. Diverging interests between preparers and their clients complicate the decision to withdraw claims, especially in light of the ongoing investigations and potential legal repercussions. The situation has created uncertainty for both parties, as they navigate the complexities of the ERC landscape. Despite the challenges, the IRS reports progress, stating that it is processing payments for 50,000 low-risk ERC claims. However, the agency acknowledges that the evaluation of these claims has been resource-intensive, leading to a backlog. Alarmingly, about 10% of taxpayers who filed ERC claims may need to take legal action to rectify incorrect IRS decisions, exacerbated by the agency's failure to provide clear appeal instructions in many cases. The IRS's admission of errors in processing claims raises concerns about the efficiency and effectiveness of the ERC program. As the agency faces the daunting task of addressing wrongful refunds, the implications for taxpayers and the broader tax system remain significant, with many now weighing the potential benefits of pursuing their claims against the risks involved.