In response to a surge in questionable claims, IRS Commissioner Danny Werfel recently issued a directive to halt the immediate processing of new applications for a pandemic-related small business tax benefit. The employee retention credit (ERC), which was designed to assist small businesses during the Covid-19 pandemic, offers substantial financial relief, amounting to possibly thousands of dollars per employee. However, the program has led to an increase in specialized firms making false promises to businesses about their eligibility for this complex tax break.

The suspension in processing new ERC claims is expected to last until at least the end of the year. For existing claims, the typical processing time of 90 days may now extend to 180 days or potentially even longer.

Rising Concerns at IRS Over Deceptive Practices

The IRS has expressed heightened concern over a growing threat of dishonest parties taking advantage of honest small business owners. The agency is witnessing a surge in questionable claims, prompting action to protect unsuspecting filers.

With an influx of approximately 3.6 million claims throughout the program’s duration, the current backlog exceeds 600,000 claims, a majority of which have been submitted within the last 90 days. This surge in recent submissions has further intensified the IRS’s vigilance against potential scams and prompted measures to address the growing issue.

Beginning in July of this year, the criminal investigation division of the IRS launched 252 inquiries into potential fraudulent ERC claims that amounted to over $2.8 billion. Among these investigations, 15 have progressed to federal charges, with six of the cases resulting in convictions. The IRS’s proactive measures aim to curb fraudulent activities related to the ERC.

The agency is in the process of developing a settlement program for small businesses that might have erroneously received the reimbursement. In the meantime, the IRS is appealing to small business entities to consult with trusted tax professionals.