Fraudulent ERC Claims Delay IRS’s Plans to Refocus SB/SE Division

Fraudulent filings for employee retention credits continue to take up a significant portion of the IRS’s time, but the agency remains focused on upgrading tax-filling and customer service systems, an agency official said on March 21.

The IRS Small Business and Self-Employed Division will continue to focus on fraudulent ERC fillings through fiscal 2024, after which the division will “slowly pivot” to a focus on high-risk employment task issues, said Daniel Lauer, director of examination for the division.

Even though the ERC is now expired, the agency “continues to receive claims using the old [2020] Form,” he said in comments delivered at the American Payroll Association’s Capital Summit.

The division’s pivot, expected to take place in fiscal 2025, will refocus on reporting compliance, high-risk large and midsize employers, and worker classification, among other high-risk employment task issues, he said.

Regarding fraudulent filings of employee retention credits, most of the cases examined by the division are due to the employer’s failure to understand the credits requirement. “Suspension of operations is what matters,” said Lauer. “If your employees are sent home but can still work, you don’t qualify.”

Lauer also noted employers’ failure to aggregate income, saying applicants “aren’t aggregating gross receipts for the gross receipts test.” An aggregate gross receipt total is the income figure the IRS uses to apply tax credits, like the ERC.

The IRS continues to see third parties promote fraudulent Covid-19 credit schemes, charging employers fees while failing to inform taxpayers of required income reductions, he said. “The credit reduces wage expense on income tax returns.” he added, “Many folks aren’t going back to reduce income.”

Lauer encouraged employers’ assistance in reporting third-party promoters to the IRS.

Employers should “carefully review guidelines before trying to claim credits,” he warned.

Modernization Plans

Adjustments are underway as the IRS continues modernizing its infrastructure. “A strong technology infrastructure is critical to delivering the vision that was reported to Congress in January 2021,” Lauer said. The report, mandated by the 2019 Taxpayer First Act, covers a variety of updates ranging from upgrades to taxpayer services, improved employee training, and a clear organizational structure.

The IRS “understands that quality personalized service is key,” he said. However, “without a commitment of multilayered funding, the IRS can’t make the changes in the report.”

Regarding the IRS’s upcoming 10-year plan, Lauer encouraged employers, “Look back at the Taxpayer First Act report. It’s a great foreshadowing of what the IRS plans to do.”

With the passage of the 2022 Inflation Reduction Act, the IRS received a boost in funding “to improve our services and technology,” said Lauer. “We’re working to implement the law as quickly as we can” but cautioned that, “since the inflation reduction act is a 10-year plan, the changes won’t happen immediately.”

As part of its plans to modernize, the IRS is also seeking to digitize many of its forms. There’s “lots of scanning going on,” he said. The IRS’s immediate goal is to “digitize every form and every schedule” in hopes of speeding the filing process and improving the taxpayer experience, he said.

The IRS is also decommissioning many forms to streamline filing procedures, Lauer said. “Form 941 for commonwealths will all be eliminated.” he said, adding that, “Form 941 PR will no longer be available.” Employers will now file “Form 941 or the new Spanish version, Form 941SP.”

The IRS is also looking to decommission Form 944 due to an “extremely low filing population,” stressing the Form “causes employers many challenges” and result in “lots of rejects [and] lots of correspondence.”