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Following an audit of 1 million claims from businesses seeking the Employee Retention Credit (ERC), the Internal Revenue Service (IRS) revealed Thursday that the “vast majority” of these claims, totaling $86 billion, are likely improper.

The IRS’s review indicated that approximately 10% to 20% of the claims exhibited “clear signs of being erroneous,” with tens of thousands of these set to be denied in the upcoming weeks. Furthermore, 60% to 70% of the claims presented an “unacceptable risk” of being improper and will undergo additional scrutiny.

IRS Commissioner Danny Werfel stated, “The completion of this review provided the IRS with new insight into risky Employee Retention Credit activity and confirmed widespread concerns about a large number of improper claims. We will now use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to help taxpayers without any red flags on their claims.”

Around 10% to 20% of the claims were assessed as low risk and will proceed to processing, with the first payments anticipated later this summer. However, the IRS has maintained a moratorium on new ERC claims submitted after September 14, 2023, and this suspension will remain in effect.

Originally designed to help businesses retain employees during pandemic-related shutdowns, the ERC quickly became a target for fraudulent activities. The complexity of its eligibility criteria provided an opportunity for scammers to exploit small businesses, promising assistance with ERC applications for a fee, regardless of actual eligibility.