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IRS halts processing of a small business tax break amid ‘surge of questionable claims’

IRS Commissioner Danny Werfel speaks at a Senate Finance Committee hearing in Washington, D.C., on April 19, 2023.
Al Drago | Bloomberg | Getty Images

IRS Commissioner Danny Werfel on Thursday ordered the agency to immediately stop processing new claims for a pandemic-era small business tax break to protect filers from a “surge of questionable claims.”

The employee retention credit, or ERC, was created to support small businesses during the Covid-19 pandemic. It can be worth thousands of dollars per employee and has sparked a flood of specialist firms falsely promising businesses they qualify for the complicated tax break.

“This great program to help small businesses has been overtaken by aggressive promoters,” Werfel told reporters on a press call. “It was not designed to be a gravy train for promoters, flooding the IRS with eligible applications that slow down work on ERC and other important matters for taxpayers.”

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The processing pause on new ERC claims will be in effect through at least the end of 2023. Normal processing times for existing claims could stretch from the standard goal of 90 days to 180 days or longer.

IRS increasingly alarmed by ‘unscrupulous actors’

“The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in,” Werfel said.

The IRS has received roughly approximately 3.6 million claims over the course of the program and the current open inventory is over 600,000 claims, most of which have been received over the past 90 days.

As of July 1, 2023, the IRS criminal investigation division has initiated 252 investigations involving over $2.8 billion of potentially fraudulent ERC claims. Some 15 of the 252 investigations have resulted in federal charges and six of the 15 have resulted in conviction, Werfel said.

“We want businesses to step back and talk to a trusted tax professional, not a promoter out looking to take a big chunk of a refund,” he said.

The agency is working on a settlement program for small businesses that may have wrongly received the refund.

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