Topline: Up to 90% of claims submitted for the pandemic-era Employee Retention Tax Credit show an “unacceptable level of risk” of containing errors or deliberate fraud, according to a press release from the IRS.
Key facts: Business owners can claim tax refunds for up to $28,000 in wages paid to each employee between March 2020 and December 2021 if their business was shut down by the government or saw its revenue decline by at least 20% during the pandemic.
The tax credits had strict limits when they were created in 2020 but were expanded last year. That opened the floodgates for an extra $86 billion in claims, and the IRS paused applications in September because they simply couldn’t keep up with all the paperwork.
Between 10% and 20% of the claims are in what the IRS calls the “highest-risk group,” which show “clear signs” of errors. An additional 60% to 70% also show “risk indicators.”
The IRS has already canceled $2 billion from erroneous claims, according to the press release. It has also opened 450 criminal cases into potentially fraudulent claims worth $7 billion. Thousands more are currently being audited, and there are 1.4 million claims waiting to be processed.
Search all federal, state and local government salaries and vendor spending with the AI search bot, Benjamin, at OpenTheBooks.com.
Critical quote: IRS Commissioner Danny Werfel blamed most of the issues on private tax companies that he says “misled” ineligible businesses into applying for the credits.
“These claims are clogging the system for legitimate taxpayers,” Werfel said. “We worry that ending the moratorium might trigger a gold rush by aggressive marketers that could lead to a new round of improper claims “
Background: When the tax credit was first established in 2020, the Congressional Budget Office estimated it would cost $55 billion.
Since then it’s been extended three times, and now the nonprofit Committee for a Responsible Federal Budget estimates it will cost over $550 billion unless changes are made. $230 billion had been paid out at the end of 2023.
Recent estimates also show the federal government lost about $1 trillion to fraud during the pandemic, but only $1.4 billion has been recouped.
Summary: A program once meant to help the most vulnerable American small businesses is now home to billions of dollars in fraudulent claims.
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