IRS Commissioner Warns of High Fraud Rate in COVID-19 Tax Relief Claims

IRS Commissioner Danny Werfel recently engaged in discussions with senators regarding a troubling report concerning fraudulent claims for a COVID-era tax break. 

The tax break in question, known as the employee retention tax credit, was initially designed to incentivize businesses to retain employees during the pandemic. However, its expansion inadvertently led to a surge in fraudulent claims, costing the federal government substantially more than anticipated.

Sen. Ron Wyden highlighted Werfel’s tacit acknowledgment of the issue during the meeting, underscoring the urgency to address it promptly. Lawmakers from both sides of the aisle, including Sens. Elizabeth Warren and Ron Johnson, agree on the necessity to terminate the program due to the widespread fraud it has facilitated.

The Joint Committee on Taxation estimates that winding down the program and imposing stricter penalties for improper claims could generate significant revenue over the next decade. 

To offset the associated costs, lawmakers propose redirecting funds to support business tax breaks and expanding the child tax credit for low-income families, offering much-needed relief with an estimated average tax cut of $680 in the first year.

IRS Initiatives Yield Results

While bipartisan support exists in the House, passage through Congress remains uncertain, with key senators expressing reservations about certain aspects of the proposed legislation. Nevertheless, a strong House vote could expedite Senate action.

The proposed bill aims to halt new claims for the employee retention credit after January 31, 2024, with the goal of curbing further fraudulent activity. 

In response to the issue, the IRS has implemented special withdrawal and voluntary disclosure programs for unprocessed claims, resulting in a notable decline in weekly claims and indicating progress in combating fraud.

Lawmakers stress the importance of reducing fraudulent claims not only to preserve taxpayer dollars but also to expedite the resolution of legitimate claims. With a backlog of approximately 1 million claims as of early December, streamlining the process is deemed crucial.

While the employee retention tax credit was well-intentioned, its vulnerability to abuse underscores the imperative for more rigorous oversight in future relief programs. As Congress grapples with the complexities of fiscal policy, finding effective solutions remains a significant challenge.