Employers take IRS offer, return $225M in 'improper' pandemic employee tax credits

Employers who improperly received tax credits to retain workers during the pandemic have returned more than $225 million to the IRS as part of a voluntary disclosure program that ended on March 22.

Congress created the employee retention tax credit, or ERC, to encourage employee retention. However, the credit spawned a number of fraudulent or ineligible claims. Last September, the IRS issued a moratorium on processing new claims, increased audits and gave employers ways to withdraw pending claims or send back money they already had received

The money returned so far came from more than 500 employers who were required to disclose information about ERC firms they used to seek the credit. The IRS is reviewing 800 additional submissions, and more were arriving at the deadline, so the repayment total is expected to grow. Under the disclosure program, employers who determined they weren’t actually eligible were allowed to keep 20% of the money, often about equal to the fees paid to ERC firms. The employers also got relief from interest and civil penalties.

The IRS still is reviewing 1.2 million tax-credit claims. It is moving slowly through claims filed before mid-September 2023 and has yet to resume processing claims submitted after that date. The agency expects to lift the moratorium late this spring but hasn’t set an exact date. In addition, IRS criminal investigators are examining about $3 billion worth of ERC claims.

Although the ERC has expired, because it is part of the tax code, taxpayers have the usual three years after filing a return to amend it. This means that 2020 claims can be filed until mid-April this year and 2021 claims can be filed until mid-April 2025.

A bipartisan bill in Congress would cut off the ERC for all claims filed after Jan. 31, 2024, which would prevent the government from paying about $78 billion, according to the congressional Joint Committee on Taxation. The legislation also would increase penalties on ERC promoters and give the IRS more time to audit ERC claims. If it becomes law, officials said, the agency may reopen the voluntary disclosure program, although employers would not receive a better deal.

Related: IRS gives businesses ‘a way out’ of the employee retention credit, with instructions

“The IRS has made important progress in our compliance efforts protecting more than $1 billion in revenue in just six months, but we remain deeply concerned about widespread abuse involving these claims that have harmed small businesses,” IRS Commissioner Danny Werfel said. “We are encouraged by the results so far of our initiatives designed to help misled businesses, and the IRS will continue our broader compliance work given the aggressive marketing we’ve seen with this credit.”