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IRS paid out over $100M in improper, potentially fraudulent COVID relief business tax credits

Three new employer tax credits were available to businesses under the Families First Coronavirus Response Act and the Coronavirus Aid, Relief and Economic Security Act.

Updated: July 31, 2021 - 10:57pm

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This week's award goes to the IRS for paying out over $100 million in improper and potentially fraudulent payments in business tax credits under COVID-19 relief legislation, according to a report by the Treasury Department Inspector General for Tax Administration.

Three new employer tax credits were available to businesses after President Donald Trump signed the Families First Coronavirus Response Act and the Coronavirus Aid, Relief and Economic Security Act into law. Businesses impacted by the pandemic could file for the sick leave credit, the family leave credit and the employee retention credit.

"In response to the enactment of legislation," the IG reported, "the IRS initiated an educational campaign to promote the availability of the various credits to employers; developed Form 7200, Advance Payment of Employer Credits Due to COVID-19; and developed processes and procedures to enable employers to request an advance payment of the employer tax credit even though the Tax Processing Centers were closed."

The IRS allowed employers to submit their forms electronically since centers were closed, and IRS employees manually reviewed and processed the returns.

The IG's review of tax year 2020 COVID-19 employer tax credits through October 1 "identified a total of 317 potentially fraudulent employer tax credits for approximately $94.2 million."

The watchdog also found the IRS paid out nearly $10 million to government entities that were ineligible under the relief legislation. A total of 533 entities were improperly paid.

The IG "identified 113 government entities that filed a Tax Year 2020 Form 941 as of September 23, 2020, that, per the FFCRA and CARES Act, are not eligible for the employer tax credits," according to the report. "These entities received erroneous employer tax credits totaling $2 million."

The IRS found hundreds more government entities received credits after Oct 1.

"As of December 17, 2020, the IRS identified an additional 420 government entities that received $7.2 million in erroneous employer tax credits and are working to reverse the credits," the IG reported. "As a result, the IRS has implemented processes and procedures to continue to identify erroneous employer tax credit claims associated with government entities."

The IG also found the agency processed returns more than once and also processed employer tax credits above the allowable amount under the two pandemic relief laws.

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