IRS Boosts Safeguards on Tax Credit to Prevent PPP-Like Fraud

The Internal Revenue Service (IRS) has placed a moratorium on processing new claims for the Employee Retention Credit (ERC), a pandemic-era relief program, aiming to prevent a recurrence of the sort of fraud that happened around the Paycheck Protection Program (PPP).

This decision comes in response to growing concerns about the influx of ineligible claims and aggressive marketing tactics that are putting businesses at financial risk when applying for the ERC, the IRS said in a Thursday (Sept. 14) press release.

IRS Commissioner Danny Werfel has ordered the immediate moratorium on processing new ERC claims, beginning Thursday (Sept. 14) and effective until at least Dec. 31.

The U.S. government incurred tens of billions of dollars in losses due to high volumes of fraud that sullied the pandemic-era PPP, PYMNTS reported in December 2022. Many of the loans distributed by that program were forgivable, but many of the companies receiving them turned out to be fraudulent or ineligible.

With its new measures regarding the ERC, the IRS aims to prevent further abuse of the program and protect honest small business owners from scams that pressure them to apply, according to the press release.

The ERC, also known as the Employee Retention Tax Credit or ERTC, is a refundable tax credit designed to assist businesses that continued paying employees during the COVID-19 pandemic, the release said. It applies to businesses that faced full or partial suspension of operations due to government orders or experienced a significant decline in gross receipts during specific eligibility periods.

However, the complexity of the credit and the passage of time since the program’s inception have raised concerns about improper claims, per the release.

While the moratorium is in effect, the IRS will continue to process previously filed ERC claims, according to the press release. However, due to heightened fraud concerns, processing times will be longer. The standard processing goal of 90 days will be extended to 180 days or more, depending on the claim’s compliance review or audit requirements. Taxpayers may be asked to provide additional documentation to verify the legitimacy of their claims.

The enhanced compliance review of existing claims submitted before the moratorium is meant to protect businesses from penalties and interest payments resulting from fraudulent claims pushed by promoters, the release said. The IRS emphasizes the importance of ensuring that claims are legitimate and urges businesses to seek assistance from trusted tax professionals who understand the complex ERC rules.

The IRS is also working closely with the Justice Department to address fraud in the ERC program and crack down on promoters who disregard the rules and pressure businesses to apply, per the release. The IRS’s Criminal Investigation division is actively identifying instances of fraud and referring cases for potential prosecution.