IRS freezes COVID-19-era employer tax benefit amid ‘questionable claims’

The Internal Revenue Service said Thursday that it is freezing a COVID-19-era employer tax benefit until it figures out ways to prevent what it calls rampant fraud, The New York Times reported.

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According to the agency, it has started more than 250 criminal investigations involving fraudulent claims filed through the Employee Retention Credit that allegedly have cost the federal government nearly $3 billion.

The ERC was created to help small businesses keep people employed during the coronavirus crisis, according to the IRS.

Businesses have been able to seek up to $26,000 for each employee on their payrolls if they can show that their operations were fully or partly suspended in 2020 or part of 2021, and report a significant decline in their revenues during that time.

Before the moratorium was announced, businesses had until 2025 to file claims. Nonprofit organizations and churches could also file for the credit.

“We are deeply concerned that this program is not operating in the way it was intended,” IRS Commissioner Daniel Werfel said on Thursday. “We believe you should see only a trickle of employee retention claims coming in. Instead, we are seeing a tsunami.”

IRS officials have warned that the program is being exploited by “tax mills,” or companies that have been luring taxpayers who are not eligible for refunds to submit applications anyway.

Some of these companies receive either commissions for submitting applications or a percentage of the refund, the Times reported.

According to The Associated Press, the IRS has received 3.6 million claims for the credit over the course of the program. It began increasing scrutiny of the claims in July, the AP reported.

The IRS is adding a way for small businesses to withdraw their claim if they no longer think they’re eligible. The agency said about 600,000 claims are pending.