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On Tuesday, July 25, 2023, IRS Commissioner Danny Werfel announced an increased concentration of effort by the IRS to fight what the IRS has labeled fraudulent Employee Retention Credit (ERC) claims.
“The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining,” Werfel told attendees at the IRS Nationwide Tax Forum in Atlanta. “Instead, we continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, the IRS continues to intensify our compliance work in this area."
Commissioner Werfel further stated, “The amount of misleading marketing around this credit is staggering, and it is creating an array of problems for tax professionals and the IRS while adding risk for businesses improperly claiming the credit. A terrible scenario is unfolding that hurts everyone involved — except the promoters.”
Taxpayers have been inundated with aggressive ERC promoters that are very persuasive. The IRS has cautioned tax preparers that fraud penalties may apply if the preparer is signing any tax return with an ERC that is found to be fraudulent.
The IRS has a complete team of auditors trained in evaluating the ERC where they believe the greatest risk of abuse lies. Separately, the Criminal Investigations Division (CID) is actively and aggressively identifying promoters of fraudulent claims.
There are clear warning signs that a promoter may not be offering a legitimate ERC:
The IRS also released Office of Chief Counsel Memorandum Number AM 2023-005, which closely examines some of the questionable supply chain-based justifications for claiming the ERC. The memorandum provides additional guidance related to the definition of a "Full or Partial Suspension of Operations" due to supply chain disruption and the determination of:
This memorandum provides five scenarios that we at Delap have heard repeatedly from ERC promoters as being eligible scenarios for claiming the ERC. However, of these, only one was considered qualified by the IRS in the memorandum, and even that one was limited to the time during which there was an active government order in place.
The eligibility for the Employee Retention Credit is an extremely technical determination. We are here to assist you in determining whether you are eligible for the ERC, and, if so, we can also assist you in the calculation of the credit. We believe that if you are eligible for the ERC, you should apply and receive the credit. We cannot and will not assist in the application for, or reporting of, any ERC that is not supported by complete documentation of eligibility.
If you have questions about your eligibility for an ERC or concerns about an ERC that you have already received, please contact your Delap advisor and we will assist you in navigating through the process.