The Employee Retention Tax Credit (ERTC), created under the CARES Act to incentivize businesses to retain employees during the COVID-19 pandemic, has become a target of widespread abuse and misapplication. The Internal Revenue Service (IRS) is actively working to combat fraudulent claims and improper filings. However, it is important to distinguish between the sources of abuse and legitimate actors in the payroll and employment services sector. In particular, Professional Employer Organizations (PEOs) and employee leasing companies are not the source of these problems and continue to provide compliant, well-documented ERTC services to their clients.
The ERTC was designed to provide a refundable tax credit to eligible employers who continued paying employees despite experiencing economic hardship during the COVID-19 pandemic. Eligibility and credit amounts were governed by specific criteria, including revenue decline thresholds and operational suspensions due to government orders. However, the complexity of the rules, combined with the substantial financial benefits of the credit, created fertile ground for aggressive marketing and fraudulent claims.
The Current IRS Landscape
The IRS has reported a significant influx of suspicious and potentially fraudulent ERTC claims, leading to the following actions:
● A temporary moratorium on processing new ERTC claims (as of September 2023) to slow down the flood of submissions and give the IRS time to investigate.
● Increased enforcement activity, including criminal investigations and civil audits.
● The introduction of a voluntary withdrawal program, allowing businesses that filed improper claims under the influence of misleading third-party promoters to retract them without penalty.
These measures reflect the IRS’s recognition that many claims are being filed by businesses that either misunderstood the requirements or were misled by unscrupulous advisors.
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Key Problem Areas
The IRS has consistently identified the following issues contributing to the ERTC backlog and fraud:
● Aggressive third-party promoters are promising large refunds without proper qualification reviews.
● Improper documentation supporting claims, including fabricated or overstated eligibility.
● Noncompliant pop-up tax services that charged contingency fees and failed to adhere to professional standards.
Notably absent from the IRS’s enforcement bulletins are widespread problems involving Professional Employer Organizations (PEOs) or legitimate employee leasing companies.
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Distinguishing PEOs from the Problem
Professional Employer Organizations (PEOs) and certified employee leasing companies operate under strict regulatory frameworks and professional guidelines. Key points of distinction include:
● IRS Certification (CPEO program): Many PEOs participate in the IRS’s Certified Professional Employer Organization (CPEO) program, which imposes rigorous reporting, bonding, and tax compliance requirements.
● Centralized compliance systems: PEOs use advanced payroll and tax systems to track employee eligibility and credit calculations according to IRS regulations.
● Transparency and documentation: PEOs maintain thorough records and provide clients with substantiated and fully auditable filings, reducing the risk of improper claims.
PEOs have worked diligently with clients and the IRS to ensure accurate and ethical use of the ERTC program. Their role is administrative and advisory—not promotional—and their business model depends on long-term trust and compliance.
Conclusion
While the IRS’s concerns with the ERTC program are serious and well-founded, it is crucial for businesses, policymakers, and the public to understand that these problems stem primarily from opportunistic actors operating outside the bounds of professional employment services. PEOs and employee leasing companies continue to be partners in compliance, not contributors to the problem.
Efforts to restore integrity to the ERTC system should focus on education, enforcement against fraudulent promoters, and support for legitimate employers seeking fair tax relief. The distinction between fraudulent actors and compliant service providers must remain clear in any public discourse or regulatory action.
Recommendations
1. Public Education Campaigns: The IRS and industry groups should work together to educate businesses about distinguishing legitimate tax advisors and PEOs from bad actors.
2. Continued Support for CPEOs: The IRS should maintain strong support for the CPEO program and encourage more transparency from all ERTC processors.
3. Clear Guidance and Appeals: Businesses that filed ERTC claims through compliant PEOs should have access to expedited review processes to prevent unnecessary delays.
