IRS Scrutinizes Employee Retention Credit Claims Amid Lawsuits and Congressional Disputes

The Internal Revenue Service is scrutinizing improper claims made by businesses for the Employee Retention Credit (ERC). This refundable tax credit was available to certain eligible businesses and tax-exempt organizations impacted during the COVID-19 pandemic. The ERC program expired in 2021.

A moratorium has halted the processing of claims filed after mid-September 2023.

The Wall Street Journal reported that the IRS plans to reject tens of thousands of claims deemed most likely to be improper. The article highlighted that pop-up firms and marketers have created a niche industry, encouraging numerous claims long after the pandemic’s emergency phase ended, many of which are considered questionable by the IRS.

The government has distributed approximately $230 billion through this program.

IRS Commissioner Danny Werfel expressed deep concern over the number of taxpayers misled by promoters into believing they are eligible for significant payouts. He emphasized that while some may think they qualify, many do not meet the legal requirements.

In January, the GOP-led House of Representatives voted to end the Employee Retention Credit (ERC) for claims filed after January 31, 2024, aiming to save an estimated $80 billion. However, the Democrat-led Senate blocked this move.

By mid-May, there were 1.4 million unprocessed ERC claims, with 880,000 filed before the moratorium, according to the government.

Last month, Stenson Tamaddon, a tax advisory firm based in Phoenix, sued the IRS, the United States, the U.S. Department of the Treasury, IRS Commissioner Daniel Werfel, and Treasury Secretary Janet Yellen.

The company claims that the IRS violated the Administrative Procedure Act (APA) by issuing rules without proper procedures, specifically regarding “Notice 2021-20,” which restricted ERC eligibility.

CEO Eric Stenson stated that the IRS overstepped its authority and imposed unfair restrictions on businesses eligible for the ERC. He emphasized the need for the IRS to provide clear criteria for what constitutes a high-risk claim and to be more transparent about the risk markers used.