I.R.S. Extends Freeze of Pandemic-Era Tax Credit Amid Widespread Fraud

The Internal Revenue Service is expanding its efforts to crack down on fraud in a pandemic-era tax credit program following an internal analysis that found a majority of outstanding claims appeared to be improper.

The agency said on Thursday that it was extending its freeze on new claims for the program, the Employee Retention Tax Credit, which was created in 2020, during the throes of the pandemic and allows businesses to collect up to $26,000 for each employee on its payroll. The I.R.S. is also denying tens of thousands of claims that it determined to be erroneous.

The original program, which was expanded in 2021, was projected to cost the federal government $55 billion over a decade. But by last September, the I.R.S. had received nearly four million applications and had paid out $230 billion in employee retention refunds. It currently has a backlog of 1.4 million claims.

Daniel Werfel, the I.R.S. commissioner, warned that the agency’s enforcement teams are scrutinizing claims closely and investigating illicit tax preparation companies that have been encouraging ineligible taxpayers to apply.

“The I.R.S. remains deeply concerned about how many taxpayers have been misled and deluded by promoters into thinking they’re eligible for a big payday,” Mr. Werfel said.

The tax benefit was created as part of the initial $2 trillion pandemic relief legislation signed into law by President Donald J. Trump. It offered businesses thousands of dollars per employee if they could show that Covid-19 had reduced their incomes and that they were continuing to pay workers.