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Awaking A Sleeping Dragon - The IRS

Most of my clients know one of my favorite go-to phrases when dealing with tax reporting is, “Let’s not wake up the sleeping dragon.” What do I mean? The IRS, when in “normal” mode is fairly docile and can be reasoned with, issues handled professionally, most agents are friendly, etc. BUT, when something triggers the IRS, the power they wield to make a person’s life a living hell is immense. Best not to arouse that “dragon mode” of the IRS.

Well, I’ve been saying this for 7 months, “The flurry of fly-by-night “experts” who have been bombarding every business with promises of large refunds using the Employee Retention Credit (ERC), are going to wake up the sleeping dragon someday.” Well, they’ve done it!

It all began with a noble idea. Help those employers who had to lay off employees, thus not qualifying for the PPP Loans. Then Congress expanded the definition of qualifying businesses for ERC, that wasn’t enough, Nancy Pelosi and Co expanded it again. Muddying up the waters of defining who qualifies for an ERC. Combine that with the IRS at record low staffing levels (they lost about 30% of their workforce due to COVID…which hasn’t all come back even today), and you have the “Perfect Storm” created for scammers to jump in and make some money off all the confusion.

One of these “experts” told one of my larger clients, that if they ordered a part to repair some equipment and it took 3 days longer to get the part than pre-COVID, that qualifies them for multi-millions in ERC. (I helped that client avoid fraudulently applying for the ERC in that circumstance, but they told me most of their competitors all applied and got the ERC under those very same pretenses.)

Well, the first stirrings of an awakening dragon came back in October 2022, when the IRS published at least six warnings about ERC abuse, including making it No. 1 on its annual “Dirty Dozen” list of the 12 top tax scams. A seventh warning just came out last week. As of March 2023, 866,326 employers have filed ERC claims totaling $156.6 billion. The IRS is currently backlogged with processing many of those ERC claims.

Here comes the sleeping dragon. As of April 2023, the IRS Criminal Investigation (IRS-CI) had initiated 122 investigations into fraudulent ERC claims that resulted in federal CRIMINAL charges. 6 have resulted in convictions, with 3 having average prison sentences of at least 22 months. And the IRS-CI is just getting started. They’ve now identified the issue, defined it, figured out how to find it and are re-programming their computers to flag potential ERC abusers. This will go on for at least 3 years. (That’s usually how long the IRS has to challenge a fraudulent tax refund claim…although in a criminal case they can stretch that out many more years.)

Folks, the dragon is awake now.

What can you take away from this? If you have NOT yet applied for an ERC and are thinking of doing it, consult your CPA before signing up with one of these scam ERC providers and opening you up to eventually going through an IRS-CI audit.

Have you heard? Proverbs 14:5 says, “A truthful witness will not lie, but a false witness pours out lies.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at Also on Facebook.

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