The IRS has announced they are taking a closer look at those businesses who were promoting the tax credit inappropriately and the businesses that claimed the Employee Retention Credit during the pandemic-era tax years.

“During the COVID-19 pandemic, tax credits and loans were extended to struggling businesses. We’ve seen many of these COVID-relief programs and credits misappropriated – sometimes knowingly and in other instances not,” said IRS CI Chief Jim (IRS Jan. 25, 2024).

According to Going Concern, the CI has over 352 open investigations tallying up to 2.9 billion dollars in fraudulent ERCs during the tax years of 2020-2023.

How did this happen?
Here are some ways businesses could have obtained ERC funds fraudulently:

Fabricated Payroll and Expenses: Businesses might have submitted fake payroll reports or inflated their expenses to qualify for a larger credit.
Shell Companies and Identity Theft: Criminals might create fake businesses with fabricated tax documents to claim the credit. In some cases, they might even steal the identities of real businesses to make fraudulent applications.
Misrepresenting Business Activity: Some businesses might have misrepresented their industry or the impact of COVID-19 on their operations to qualify for the credit.
Multiple Applications: A business might have submitted multiple applications under different names or for different locations to receive more funds than they were entitled to.
Lying about Employee Retention: In some cases, businesses might have claimed to retain employees even if they had actually laid them off.

What to do about it?
Good news, having your taxes audited as a small business is rare. Rocket Lawyer believes there’s only about a 2.5% chance it would occur any given year.

For those who claimed the ERC credit, the IRS is taking a closer look at 7 suspicious warning signs and urging businesses to revisit eligibility. Ideally, this would be done before March 22, 2024.

The IRS is not ‘hanging you out to dry’ though. They are hosting a series of educational sessions geared specifically for tax professionals about the ERC across the country. Additionally, the IRS is offering a couple of options to consider, the Voluntary Disclosure Program and to file a Withdraw claim.