IRS says ‘vast majority’ of 1 million pandemic-era credit claims show a risk of being improper

NEW YORK (AP) — The Internal Revenue Service said Thursday a review of 1 million claims for the Employee Retention Credit representing $86 billion shows the “vast majority” are at risk of being improper.

The ERC was designed to help businesses retain employees during pandemic-era shutdowns, but it quickly became a magnet for fraud. Its complex eligibility rules allowed scammers to target small businesses, offering help applying for the ERC for a fee — even if they didn’t qualify.

About 10% to 20% of the 1 million claims show “clear signs of being erroneous” and tens of thousands of those will be denied in coming weeks, the IRS said. Another 60% to 70% show an “unacceptable risk” of being improper and will be further evaluated.

“The completion of this review provided the IRS with new insight into risky Employee Retention Credit activity and confirmed widespread concerns about a large number of improper claims,” said IRS Commissioner Danny Werfel. “We will now use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to help taxpayers without any red flags on their claims.”

About 10% to 20% show low risk, and the IRS will begin processing those claims. The first payments for that group should begin later this summer.

The IRS stopped processing new claims in September and it said Thursday that the moratorium on ERC claims submitted after Sept. 14, 2023 will continue.

The IRS said businesses can pursue the claim withdrawal process if they need to ask the IRS not to process an ERC claim for any tax period that hasn’t been paid yet.