IRS Allows Taxpayers to Retain 20 Percent of Pandemic-Era Tax Credit Without Penalty for Wrongful Claim

The IRS has recently introduced an initiative to encourage taxpayers to return money received as a result of incorrect claims made during the pandemic period. The program allows individuals to keep 20 percent of the funds as an incentive for participation. The program particularly applies to those who mistakenly filed for the Employee Retention Credit (ERC), a relief program meant for employers who continued paying their employees during COVID-19 shutdowns.

The IRS made the announcement on Dec. 21, citing an increase in fraudulent ERC claims. This worrying trend prompted the IRS to come up with more lenient ways for taxpayers to rectify their mistakes. The voluntary disclosure program aims to help employers who were inadvertently misled into filing ERC claims. IRS Commissioner Danny Werfel emphasized the importance of providing taxpayers with an opportunity to “get right with a lower financial cost.”

Employers who want to correct their ERC claims must apply to the new disclosure program by March 22, 2024. To be eligible, applicants must not be under criminal investigation or IRS employment tax examination. Participants will only need to repay 80 percent of the credit they received, with the option to set up an installment agreement to pay it back over a longer period. The program also waives interest and penalties on repaid credits.

The IRS decided to let taxpayers keep 20 percent of the claimed amount due to the exploitation by promoters who demanded a fee for their services. Employers participating in the program are required to provide information about their advisers or tax preparers, aiming to unearth those who instigated the false claims.

In a move to further address the epidemic of wrongful claims, the IRS is accelerating its ERC compliance activities. The agency has started issuing thousands of letters notifying taxpayers of proposed tax adjustments that will recapture incorrectly claimed ERC. Additionally, the IRS has sent out 20,000 denial letters to taxpayers, informing them that their ERC claims have been disallowed.

The special withdrawal process introduced on Oct. 19 allows businesses to withdraw questionable ERC claims, avoiding penalties and interest. Withdrawing a claim results in its treatment as if it were never filed, and the IRS won’t impose penalties or interest. Even if a taxpayer has received the ERC refund but hasn’t cashed or deposited it, they can still withdraw their claim.

Overall, the voluntary disclosure program and the special withdrawal process reflect the IRS’s commitment to addressing and rectifying the surge of fraudulent claims during the pandemic. The initiatives seek to provide taxpayers with an opportunity to correct their errors and satisfy their obligations without facing severe financial repercussions. By offering a more lenient option for repayment, the IRS hopes to encourage greater participation in rectifying the inadvertently erroneous claims.


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