IRS learned lessons from ERC fraud wave

The Internal Revenue Service has now closed nearly all outstanding claims for the employee retention credit after it was hit by billions of dollars in improper claims, aside from about 41,000 claims still under exam or appeal, according to a new report.

The report, released Tuesday by the Government Accountability Office, found that approximately 83% of ERC refunds, or around $235 billion, were issued in 2022 through June 2025, well after unemployment had returned to its pre-pandemic level. The ERC was one of several pandemic relief programs, such as the Paycheck Protection Program and the Emergency Injury Disaster Loans, that scammers exploited after Congress rushed through the CARES Act and follow-up legislation in 2020 to pump trillions of dollars into the ailing economy.

The ERC was supposed to fund organizations that had continued to retain employees despite the pandemic. But it initially came with few safeguards or fraud detection efforts, as the IRS came under pressure to approve claims quickly and provide refunds for claims filed long after the pandemic had been alleviated, also putting pressure on tax practitioners. So-called "ERC mills" aggressively promoted the tax credit to businesses that didn't qualify. Eventually the IRS began cracking down and in 2023, and former IRS commissioner Danny Werfel imposed a moratorium on new ERC claims until the IRS could catch up on processing them while subjecting them to greater scrutiny.

Last year, the IRS's Criminal Investigation unit announced that it had launched 2,039 tax and money laundering cases related to COVID fraud in the past five years, with attempted fraud in these cases totaling $10 billion. The IRS had processed nearly 5 million claims for the ERC as of June 2025, according to the new report. The One Big Beautiful Bill Act that Congress passed last July finally put an end to the ERC tax credit, disallowing unpaid claims made after Jan. 31, 2024.

For the new report, IRS officials told the GAO the agency has now closed virtually all ERC claims, aside from those under exam or appeal, but the GAO reported noted the IRS hasn't yet communicated about this on the IRS website. The GAO recommended the IRS update the public on the current status of ERC claims.

The IRS received a large number of improper claims and was overwhelmed, the report noted. It was unable to issue most payments for the credit until after the unemployment rate returned to pre-pandemic levels. Multiple factors contributed to such claims, including marketing companies that convinced confused employers to file claims in order to receive a portion of the money.

The IRS learned several lessons from the fraud outbreak. The IRS did not complete an improper payment estimate for ERC, as required by law in part because the Treasury Department said it did not need to do so for pandemic programs as they were considered to be short term. However, the GAO pointed out that a timely estimate could have helped identify the root causes of improper payments earlier, and developing one now could guide future decisions on employment tax relief. The statute of limitations for assessing tax on certain paid improper ERCs has expired, but the IRS can still pursue fraud cases indefinitely, the GAO noted.

Employers mainly claimed the ERC on paper amended returns, according to the report. The IRS enabled electronic filing in mid-2024 but continued to process the returns manually. Automated processing of the claims would have yielded cost savings and expedited the refunds. The IRS's last public update on ERC processing status was back in October 2024, and that left uncertainties about cash flow among some employers. 

The IRS also didn't follow all the risk management and internal control principles from the GAO's 2023 Framework for Managing Improper Payments in Emergency Assistance Programs. 

The GAO made four recommendations in the report, including that it develop and report an improper payment estimate for the ERC, automate amended employment tax return processing, provide an update to the public on ERC processing, and include key principles from the GAO framework in its policies. The IRS agreed with one recommendation, partially agreed with another, and disagreed with two. The GAO insisted that all four recommendations are warranted.

The IRS closed all the remaining non-examined claims for the ERC by Dec. 31, 2025, but approximately 41,000 claims are either under examination or appeals, according to an IRS official. 

"We believe a forward-looking approach focused on policy development and lessons learned will provide greater long-term value than retrospective improper payment estimates," wrote Jarod Koopman, acting chief tax compliance officer at the IRS, in response to the report. "Such an approach supports the design of future programs with appropriate safeguards, preserves our ability to deliver timely relief when Congress enacts emergency tax provisions, and allows for continued refinement of practices that strengthen emergency tax relief administration. This work is complemented by the IRS's broader shift toward a digital-first, data-driven operating model, including ongoing digitization efforts that reduce manual processing and enhance our ability to identify and address compliance risks more efficiently."