IRS Cracks Down on Misused Pandemic Tax Credits

IRS Commissioner Daniel Werfel recently announced the issuance of over 20,000 rejection letters to taxpayers who improperly claimed the Employee Retention Credit (ERC), a measure designed to aid small businesses during the COVID-19 pandemic. This step is part of the IRS’s broader efforts to address questionable claims that have arisen, in part, due to aggressive marketing tactics encouraging improper filings.

Understanding the Employee Retention Credit

The ERC was introduced to financially support small businesses through the pandemic by offering significant tax breaks for each eligible employee. Nevertheless, the IRS observed a surge in dubious claims, leading to a temporary halt in processing new filings in September as it sought to manage the influx of questionable applications.

IRS’s Response to Dubious Filings

In response to the widespread misuse of the ERC, the IRS is taking decisive action by rejecting claims from businesses that were either non-existent or did not have paid employees during the specified eligibility period. This crackdown includes the distribution of Letter 105C to those with disallowed claims and the introduction of a voluntary disclosure program for those who mistakenly claimed the credit, aiming to mitigate potential penalties and repayments.

Future Steps and Compliance Efforts

Commissioner Werfel emphasized that these measures are just the beginning of the IRS’s compliance efforts in this area. He indicated that additional communications, including further disallowance letters and requests for the return of funds wrongly claimed, are expected to be issued soon.

Voluntary Withdrawal Process

The recent actions follow the IRS’s establishment of a special withdrawal process for small businesses that inadvertently claimed the credit, allowing them to avoid the ramifications of repayment, interest, and penalties.