The IRS and the Scale of Fraud during the Pandemic

The scale of fraud against U.S. taxpayers during the coronavirus pandemic amounts to billions, possibly even trillions of dollars. Count the Internal Revenue Service among the government agencies that enabled the frauds that were perpetrated. The numbers aren’t small, as Reason’s J.D. Tucille reports:

You can add the Internal Revenue Service to the ranks of federal agencies conceding that raining taxpayer money on all and sundry to offset the negative effects of pandemic-era closures didn’t go as well as intended. Not only was a program meant to offset the cost of paying workers during lockdowns and voluntary social-distancing prone to being gamed, but the “vast majority” of claims submitted to the program show evidence of being fraudulent.

In the course of a detailed review of the Employee Retention Credit, “the IRS identified between 10% and 20% of claims fall into what the agency has determined to be the highest-risk group, which show clear signs of being erroneous claims for the pandemic-era credit,” the IRS announced June 20. “In addition to this highest risk group, the IRS analysis also estimates between 60% and 70% of the claims show an unacceptable level of risk.”

The Employee Retention Credit was offered to businesses that were shut down by government COVID-19 orders in 2020 or the first three quarters of 2021, experienced a required decline in gross receipts during that period, or qualified as a recovery startup business at the end of 2021. But it was clear early on that scammers were taking advantage of giveaways of taxpayer money, either to claim it for themselves or to pose as middlemen helping unwitting business owners file claims.

In March of 2023, the tax agency warned of “blatant attempts by promoters to con ineligible people to claim the credit.” In September of that year, it stopped processing claims amidst growing evidence that vast numbers of applications were “improper,” as the IRS delicately puts it. In March 2024, the agency announced that its Voluntary Disclosure Program had recovered $1 billion (since raised to over $2 billion) in improper payouts from participants who got to keep 20 percent of the take.

As of September 23, 2023, the IRS had processed 3.5 million claims and paid $230 billion to those who filed for the benefit.

If only 60% of those claims were fraudulent, the lower end of the latest estimate, the fraud enabled by the IRS would have cost U.S. taxpayers $138 billion.

That’s more than the $127 billion the U.S. government spent on the Department of Transportation and all its infrastructure projects in 2023. However, the IRS can’t point to any highways, seaports, or airports to show for having sent out even more money without adequate oversight.

The IRS has recovered only about 1.5% of that loss.

Just imagine how much better the U.S. government’s fiscal situation would be if it were more serious about recovering the money it lost through the Employee Retention Credit to fraud.