This little-known pandemic-era tax credit has become a magnet for fraud
In early February, federal prosecutors in Utah accused Zachary Bassett and Mason Warr of cheating the U.S. government out of millions of dollars. The accounting firm they operated had submitted more than 1,000 fraudulent tax forms to the IRS on behalf of businesses trying to claim pandemic-era stimulus funds, the prosecutors said.
COS Accounting and Tax shut down later that month, leaving businesses and taxpayers that had paid the firm to help them claim federal money trying to figure out what had happened and why they were suddenly receiving audit notices from the IRS.
Amid the onset of the pandemic in 2020, as large swaths of the economy went into lockdown, Washington set up various programs to help keep businesses and their workers afloat. Among them was the Employee Retention Credit, a tax benefit that was created as part of the initial $2 trillion pandemic relief legislation. The program offered businesses thousands of dollars per employee if they could show that COVID-19 was hurting their bottom lines and that they were continuing to pay workers.
The money was intended to be a lifeline for struggling companies. Instead, it has become a magnet for fraud, creating a cottage industry of firms that market themselves as tax credit specialists who can help clients — even those who don’t qualify for the money — reap huge refunds from the IRS.
Although the public health emergency is over, taxpayers can continue to apply for the tax credit until 2025. That has fueled a run for the money and the proliferation of financial service providers, who often charge hefty upfront fees or take cuts of around 25% of any tax refund.
The tax credit has become so popular that it is turning out to be far more costly than expected. In 2021, after Congress expanded eligibility, the Congressional Budget Office projected that the credit would cost the federal government about $85 billion over a decade — up from an earlier estimate of $55 billion. Even that turned out to be an underestimation: The IRS said it had already paid out $152 billion in refunds associated with the tax credit and had a backlog of about 800,000 applications that it was trying to process.
The IRS does not yet know how many of the approved refunds were based on fraudulent applications. But it has begun ramping up efforts to root out scams and focusing additional scrutiny on filings from firms that appear suspicious.
On Thursday, the IRS issued a warning to businesses to be on the lookout for “scams” related to the tax credit, saying it was fueling a flood of “invalid” applications.
“These are Johnny-come-latelies showing up, and they’re pushing this product, pushing this activity, in a way that is unethical,” Douglas O’Donnell, the deputy commissioner of services and enforcement at the IRS, said in an interview. “It is drawing businesses into a trap that they will then be claiming a credit that they are not entitled to.”
O’Donnell warned that those who received refunds but were ineligible for the money would have to repay the funds with penalties. He said the IRS was aggressively auditing taxpayers who collected the refunds and the firms that processed them. He estimated that hundreds and possibly thousands of tax credit “mills” had popped up across the country in the last three years.
“They seem to be everywhere,” O’Donnell said.
The tax credits are less well known than the more popular Paycheck Protection Program, which provided forgivable loans to cover payroll, rent and utility expenses during the pandemic. But for eligible taxpayers, they have the potential to provide a substantial windfall in the form of a tax refund. Businesses, including nonprofit organizations and churches, can seek up to $26,000 for each employee on the payroll if they can show that their operations were fully or partially suspended in 2020 or part of 2021 and report a significant decline in their revenues during that time.
However, the fine print that determines if a business is eligible is complicated, and the IRS is concerned that firms that are processing applications for the credit at high volume are overlooking important restrictions in order to rake in bigger refunds and commissions.
For instance, the IRS is concerned about taxpayers dipping into multiple pots of relief money and said many tax preparation firms are not telling clients that they cannot claim the tax credit on wages if they also received money to cover payroll costs through the Paycheck Protection Program.
The ballooning cost of the program is exacerbating America’s precarious fiscal situation. The White House and Republican lawmakers are locked in a bitter fight over raising the debt ceiling, which caps how much money the United States can borrow. The Treasury Department has estimated that the government could run out of cash as soon as June 1 and has resorted to accounting maneuvers so that it can keep paying its bills.
UPDATED: Please read and follow our commenting policy: