The IRS announced that, since instituting a moratorium on processing new Employee Retention Credit (ERC) claims last September, it has identified more than $1 billion in questionable claims,  Accounting Today, The New York Times and CPA Practice Advisor reported, with an additional $3 billion in claims being reviewed by its Criminal Investigation (CI) unit.

“The IRS has made important progress in our compliance efforts protecting more than $1 billion in revenue in just six months, but we remain deeply concerned about widespread abuse involving these claims that have harmed small businesses,” said IRS Commissioner Danny Werfel in a statement. “We are encouraged by the results so far of our initiatives designed to help misled businesses, and the IRS will continue our broader compliance work given the aggressive marketing we’ve seen with this credit.”

The IRS's special ERC Voluntary Disclosure Program (VDP), has yielded more than $225 million from over 500 taxpayers with another 800 submissions processed and more filed at the last minute before the March 22 deadline, the IRS said in its statement. The ongoing claim withdrawal process for taxpayers with unprocessed ERC claims has led to 1,800 entities withdrawing $251 million. The agency has determined that more than 12,000 entities filed over 22,000 claims that were improper, resulting in $572 million in assessments.

While the IRS suspended the VDP on March 22, it may  reopen it if Congress extends the statute of limitations for ERC claims, according to the statement. The Treasury Department has proposed extending the statute of limitations to give the IRS additional time to address unscrupulous ERC claims.

"Congress is currently considering a proposal that extends the statute of limitations to give the IRS additional time to address" such claims, an IRS official said at a press conference attended by Accounting Today. "The IRS is also continuing to closely monitor pending legislation, which would provide the IRS with additional tools to address improper claims."

Currently, the statute of limitations for claims processed for tax year 2020 will expire on April 15, and assessments on tax year 2020 claims will end after that date, the IRS states. Compliance activities regarding tax year 2021 ERC claims will continue, however, since that statute does not expire until later.

"Depending on how things progress, there's a chance the IRS may reopen the ERC VDP in some fashion," said the official.

One fraudulent ERC scheme run out of a California prison led to federal charges after a joint  investigation by the FBI and IRS-CI, the Times reported. “Operation Fraud Street Mafia,” as the Department of Justice (DOJ) called it, involved a fraud operation run by a former gang member who was serving prison time for murder. He and seven outside co-conspirators, including his mother, were charged with attempted "to pursue over half a billion dollars in federal tax credits that were meant to help struggling businesses during the COVID-19 pandemic," according to the DOJ. The operation involved the co-conspirators allegedly intercepting calls and text messages exchanging information about fake businesses while using the money they made to live luxuriously.

Court documents indicated that the co-conspirators filed approximately 300 payroll tax returns that claimed over $550 million in refunds that were largely associated with the ERC, according to the Times.

The DOJ's press release said that the returns were for “fake business entities, actual businesses with overstated wages and numbers of employees, and businesses that were defunct at the time the payroll tax returns were filed.” Much of the money that they sought was not refunded because the IRS suspected fraud.