IRS Commissioner Confirms Alarming Fraud Rate in COVID-19 Tax Break Claims

IRS Commissioner Danny Werfel recently met with senators to discuss a concerning report regarding fraudulent claims for a COVID-era tax break. 

Sen. Ron Wyden recalled Werfel’s tacit acknowledgment of the issue, signaling the urgency to address it. The tax break, known as the employee retention tax credit, was intended to incentivize businesses to retain employees during the pandemic. 

However, its expansion led to a surge in fraudulent claims, estimated to cost the federal government significantly more than anticipated. Lawmakers across the political spectrum, including Sens. Elizabeth Warren and Ron Johnson, agree on the necessity to end the program due to widespread fraud. 

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

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

IRS Programs Lead to Decline in Fraudulent Claims

Despite bipartisan support in the House, passage through Congress is uncertain, with key senators expressing concerns about certain aspects of the bill. Nonetheless, a strong House vote could expedite Senate action. 

The proposed legislation would bar new claims for the employee retention credit after January 31, 2024, aiming to curb further fraudulent activity.

The IRS has taken steps to address the issue, including implementing special withdrawal and voluntary disclosure programs for unprocessed claims. These efforts have resulted in a significant decline in weekly claims, indicating progress in combating fraud.

Lawmakers emphasize the importance of reducing fraudulent claims not only to save 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 crucial.

While the employee retention tax credit was well-intentioned, its susceptibility to abuse highlights the need for more stringent oversight in future relief programs. As Congress navigates the complexities of fiscal policy, finding effective solutions remains a challenge.