IRS Provides Update on ERC Fraud Enforcement as Voluntary Disclosure Program Closes

The Internal Revenue Service (IRS) is continuing to target Employee Retention Credit (ERC) fraud in 2024. While the ERC was originally intended as a pandemic-era relief program, limited oversight allowed a substantial volume of fraudulent claims, and promoter schemes led many business owners to unknowingly claim credits for which their businesses were ineligible. As Texas tax attorney Lawrence Brown explains, ERC fraud enforcement remains a top IRS priority, and now that the IRS’s ERC Voluntary Disclosure Program has closed, business owners’ options for resolving fraudulent claims are more limited.

The IRS Has “Protected More Than $1 Billion” Since Last Fall

On the date that the ERC Voluntary Disclosure Program closed, the IRS announced that it has “protected more than $1 billion . . . since [it] instituted a processing moratorium on new [ERC] claims beginning Sept. 14, 2023.” While the IRS’s announcement is not entirely clear, this likely includes both recovering fraudulent refunds and preventing the issuance of fraudulent refunds for pending claims. The IRS’s announcement also states that an additional $3 billion in ERC claims are currently under review by the agency’s Criminal Investigation Division (IRS CI).

To date, the IRS has reportedly identified more than 22,000 improper ERC claims filed by more than 12,000 entities. As the IRS and IRS CI continue to prioritize ERC fraud enforcement in 2024, both of these figures are likely to increase significantly over the coming year.

The ERC Voluntary Disclosure Program Has Closed But May Reopen in the Future

As anticipated, the IRS’s ERC Voluntary Disclosure Program closed on March 22, 2024. The ERC Voluntary Disclosure Program provided a limited-time opportunity for eligible business owners to proactively resolve fraudulent ERC claims while repaying just 80 percent of their improperly obtained refunds.

In announcing the ERC Voluntary Disclosure Program’s closure, the IRS also indicated that it may reopen the program in the future. However, this is not necessarily good news for ERC recipients that have compliance concerns. As the IRS explains, whether it will reopen the program, “depend[s] on whether Congress extends the statute of limitations for ERC claims. The Treasury Department has proposed extending the statute of limitations to give the IRS additional time to address unscrupulous ERC claims.”

Current Options for Business Owners Who Have Concerns About Facing ERC-Related Scrutiny from the IRS

While the ERC Voluntary Disclosure Program has closed, business owners who have concerns about their ERC refunds or pending ERC claims still have options available. Due to the IRS’s focus on ERC fraud enforcement, taking a wait-and-see approach is not advisable. Present, the options for resolving ERC-related concerns include:

• ERC Claim Withdrawal – As the IRS explains, “[b]usinesses should quickly 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.” This is an option for businesses that claimed the ERC using IRS Form 941-X, 943-X, 944-X or CT-1X. Crucially, however, as the IRS also explains, “if you willfully filed a fraudulent ERC claim . . . withdrawing a fraudulent claim will not exempt you from potential criminal investigation and prosecution.”
• Filing an Amended Return (and Paying Any Taxes, Interest and Penalties Owed) – Businesses that improperly claimed the ERC and that are not eligible to withdraw their claims may be able to file an amended return. Filing an amended return may also involve paying back taxes, interest and penalties, or potentially seeking a settlement or acceptance of an offer in compromise. However, as filing an amended return does not insulate taxpayers from enforcement, this option requires a cautious approach as well.
• Submitting a Voluntary Disclosure to IRS CI – While the IRS’s ERC Voluntary Disclosure Program has closed, business owners may also be able to resolve fraudulent ERC claims under IRS CI’s long-standing Voluntary Disclosure Practice. This is an option for those who have “willfully failed to comply with tax or tax-related obligations” and who are seeking to “limit [their] exposure to criminal prosecution.” However, voluntarily disclosing noncompliance does not guarantee immunity, and entities and individuals who make voluntary disclosures can still face substantial liability.

These options are only available in circumstances in which the IRS has not initiated an audit, and IRS CI has not already initiated a criminal investigation. Once an audit or investigation is underway, “voluntary” resolution is no longer an option, and taxpayers must work with the IRS or IRS CI to seek a favorable outcome.

Determining the Best Course of Action to Mitigate the Risk of ERC Fraud Enforcement

Given the various potential ways to resolve ERC fraud-related concerns, it is critical that business owners who have these concerns make informed decisions about their next steps. When evaluating potential courses of action, a key first step is to determine whether an IRS audit or IRS CI investigation is currently underway. If not, then pursuing one of the three options listed above may be the best approach. But, if the IRS or IRS CI is already looking into your business’s ERC claim (or claims), these options are already off the table.

Making informed decisions in this scenario involves working with an experienced Texas tax attorney who can evaluate your business’s ERC claim (or claims) and communicate with the IRS effectively on your behalf as warranted. Regardless of the circumstances at hand, a proactive approach will afford the greatest opportunity to achieve a resolution that avoids unnecessary civil penalties and the potential for a federal indictment. Our firm is actively representing clients in ERC compliance and enforcement matters, and if you have concerns, we encourage you to contact us promptly to learn more.

Request a Confidential Consultation with a Texas Tax Attorney at Brown Tax, P.C.

At Brown Tax, P.C., our practice is devoted to representing businesses and high-net-worth individuals in high-stakes federal tax controversies. If you have concerns about facing civil or criminal liability for ERC fraud, we encourage you to call 888-870-0025 or contact us online promptly to request a confidential consultation.