The IRS shut down a pandemic-era tax credit program on Thursday, saying it had become too much of a target for scammers.
The Employee Retention Credit was designed to reward businesses that halted operations during the shutdowns but still paid their employees, keeping them off the rolls of the unemployed.
But IRS Commissioner Danny Werfel said the program has recently become a cesspool of fraud and had to be halted.
“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,” he said. “The further we get from the pandemic, the further we see the good intentions of this important program abused.”
He ordered a halt to new claims for the tax credit, and claims already filed will see delays as the agency takes more time to scrutinize them.
Mr. Werfel promised “new protections and safeguards” in the future to get the credit restarted under more scrupulous terms.
The IRS has received about 3.6 million claims over the life of the program, but has seen a surge in recent months with roughly 600,000 claims currently pending.
The agency said it’s working on a way to let employers withdraw those claims and avoid penalties if they believe they might have been scammed into applying.
The IRS also said it is working with the Justice Department to bring cases against scammers.
The agency’s criminal division has investigated 252 reports of fraud in the tax credit, resulting in 15 prosecutions. Six have resulted in convictions and four cases have reached sentencing, with the average penalty being 21 months in prison, the IRS said.
Scammers have been advertising their services to help businesses apply, suggesting that most businesses qualify.
In reality, the criteria were severely limiting, the IRS said.
For one thing, businesses had to have closed up or seen a dramatic drop in business due to a shutdown order, and yet still paid employees for work between March 12, 2020, and Jan. 1, 2022.
Employers also cannot double dip and claim the credit if they also won Paycheck Protection Program loans for those same employees.
Pandemic assistance programs have proved to be an unprecedented source of fraud.
The PPP and another small business loan program were both hit hard, as were expanded unemployment benefits.
The government’s top watchdog said this week that unemployment fraud may have totaled up to $135 billion.