In mid-September, the IRS immediately halted processing new Employee Retention Credit (ERC) requests. This was off the back of the Justice Department arresting a New Jersey tax preparer in August named Leon Haynes. Haynes had filed over 1,000 false tax forms for clients he advised to take out fraudulent refunds. The DOJ reports that he informed clients “... that the government was giving out COVID-relief money for businesses and that they were eligible for the money simply because they had a business.” Haynes now faces 3-years in prison and a $250,000 fine for each false ERC claim.
The IRS rolled out ERC during the pandemic as a way for employers to continue to pay employees. They would provide employers with credit up to $26,000 per worker if the government fully, or partially suspended that employer's operations.
Assumedly there are many more fraudulent claims from 2020, a problem exacerbated by the pop-up industry of ERC consultants who advised clients on how to maximize their ERC refunds during the pandemic and years following. Most concerning is the possibility that these claims may be entirely liable to the clients rather than the consultant businesses that charged a fee from the ERC claims filed by their clients.
The IRS intends to take many small businesses to court over their knowingly or unknowingly false claims. A key point of contention brought up by the IRS is that some filed ERC claims due to OSHA regulations, which the IRS states is not a viable excuse to receive the credit. They determine a definite qualification for ERC to be a provable drop in business revenue or a notice from their local government to suspend operations. The IRS has now warned employers who filed such claims in a statement, which laid out examples of what does and does not qualify for ERC. The IRS has even gone as far as to allow employers to repay their fraudulent claims without legal retribution - before receiving their audits.
New claims for ERC will not be processed until sometime in 2024, as the IRS is working to identify as many fraudulent claims from 2020 before the window for audit closes on April 15, 2024. Following the expiration of the April 15 deadline, the IRS will be limited in its ability to pursue further taxes or recover funds.
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