SUMMARY
- The Employee Retention Credit (ERC), created during the pandemic, is under increased scrutiny due to fraudulent claims.
- The IRS currently has a backlog of over half a million unprocessed amended returns, leaving room for small businesses to wrongly claim the credit.
- IRS warnings are on the rise as they uncover more "ERC schemes," raising questions on the future of the program.
The spotlight fell on a tax credit from the pandemic era this week as legislators, the Internal Revenue Service (IRS), and tax specialists sought ways to handle a surge of small businesses that incorrectly availed of the tax relief.
Introduced in 2020 amid the Covid-19 pandemic, the Employee Retention Credit (ERC) was designed to assist small businesses rocked by closures, providing a substantial amount per employee. As it remains possible for eligible businesses to revise returns and claim credits, a burgeoning sector, labeled as "ERC mills," has emerged, pushing the credit to potentially qualified or unqualified businesses.
Roger Harris, President of accounting and tax firm Padgett Advisors, argued during a recent House Ways and Means Committee hearing, “While the ERC has been a lifeline for many small businesses, it is unfortunately plagued with fraudulent claims." He pointed out that whenever large sums of money are disbursed through the tax system, malevolent actors inevitably surface.
While the IRS tackles its backlog of unprocessed amended returns, it remains uncertain how many small businesses might have incorrectly claimed the credit. According to Harris, the consequences of future audits could potentially devastate these businesses. Despite receiving more than 2.5 million ERC claims since its inception, processing has become slow due to the complicated nature of the amended returns.
“Getting the money could turn from a joyous occasion to a terrifying ordeal when you discover you were ineligible and could potentially go out of business due to the money you have to return," Harris added. There is potential for the true backlog of ERC claims to be higher due to Professional Employer Organizations (PEOs), as a single PEO claim can represent several small businesses.
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