How a Pandemic-Era Program Became a Magnet for Fraud
In early February, federal prosecutors in Utah filed charges Zachary Bassett and Mason Warr of defrauding the United States government of millions of dollars. The accounting firm he runs submitted more than 1,000 false tax forms to the Internal Revenue Service on behalf of businesses trying to claim pandemic-era stimulus funds, prosecutors said.
COS Accounting & Tax closed later this month, leaving businesses and taxpayers who paid the firm to help them claim federal money trying to figure out what to do. What happened and why are they suddenly receiving audit notices from the IRS?
Amidst the start of the pandemic in 2020, as much of the economy went into lockdown, Washington put in place various programs to help businesses and their workers keep up to speed. was among them. Employee retention credit, a tax benefit 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 meant 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 experts who can help clients — even if they Even though the public health emergency is over, taxpayers can continue to apply for the tax credit until 2025. This has fueled the proliferation of money-lending and financial services providers, who often charge hefty fees or deduct as much as 25 percent of tax returns.
The tax credit has become so popular that it is proving to be more expensive than expected. In 2021, after Congress expands eligibility for the credit, Congressional Budget Office estimates That would cost the federal government about $85 billion over a decade – up from an earlier estimate of $55 billion. However, even that turned out to be an underestimate: The IRS said it has already paid out $152 billion in refunds tied to the tax credit since it first became available and has a backlog of about 800,000 applications. Which he is 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 extra scrutiny on filings by firms that appear suspicious.
On Thursday, the IRS issued a warning Businesses are on the lookout for tax credit “scams”, saying it is fueling a flood of “false” applications.
IRS Deputy Commissioner of Services and Enforcement Douglas O’Donnell said in an interview, “These are up-and-coming people who are showing up and pushing this product, pushing this activity that way. which is unethical.” . “It’s putting businesses in a trap, that they’ll then claim credit they’re not entitled to.”
Mr 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 is aggressively auditing taxpayers who collect refunds and firms that process them. He estimated that millions of tax credit “mills” have opened across the country in the past three years.
“They seem to be everywhere,” Mr 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 costs during the pandemic. But for eligible taxpayers, they have the potential to provide substantial benefits in the form of tax refunds. Businesses, including nonprofits and churches, can claim up to $26,000 for each employee on the payroll if they can show that their work was suspended in whole or in part in 2020 or part of 2021. and report a significant drop in their income during this time.
However, the fine print that determines whether a business qualifies is complicated, and the IRS is concerned that firms processing a high volume of credit applications may incur large refunds and commissions. Ignoring important restrictions to achieve.
For example, the IRS is concerned about taxpayer relief money dipping into multiple pots and says many tax preparation firms are not telling clients that they Cannot claim 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 adding to America’s financial uncertainty. The White House and Republican lawmakers have been in a bitter fight over raising the debt ceiling, which dictates how much the U.S. can borrow. The Finance Department has estimated that the government can. As of June 1, the cash will end. And has resorted to it Accounting tricks So that he can continue to pay his bills.
Treasury officials last month pointed to employee retention credit payments as the reason federal tax revenues were smaller than expected.
Lawmakers are debating returning some unused pandemic relief funds as part of debt ceiling and budget talks, but the tax credit does not appear to be part of those discussions. Senator Kirsten Gillibrand, Democrat of New York, sent a letter to the IRS this month urging it to clean up its backlog and issue refunds faster.
More requests for tax credits are coming in every day as firms continue to make it easier to get federal money with social media sites and ads to TV and radio stations. In some cases, firms cold call potential clients.
Since last October, national cable and broadcast television networks have run nearly 9,000 ads promoting application services for employee retention tax credits, according to ad-tracking firm Vivvix/CMAG.
About three-quarters of them were sponsored by the industry’s biggest player, Innovation Refunds, which advertises on networks like CNBC and claims it takes the firm just eight minutes to determine whether a request is eligible. Whether the payer is eligible or not. The firm says it has helped businesses claim more than $1 billion in payroll tax refunds.
“It’s easy,” a narrator says in one ad. “But it’s only available for a limited time.”
Innovation Refunds, which takes a 25 percent cut of any refund a customer receives from the IRS, uses a network of tax attorneys to review applications and process forms. It secured financing from investment firm Raistone to expand its capacity to publish and process more amended tax returns.
“If you don’t have the knowledge, you’re not going to find it,” said Marylee Roselli, spokeswoman for Innovation Refunds. “We’re on the shot clock.”
Ms. Roselli added that Innovation Refunds has a rigorous system of vetting applications: “Our process is designed to deliver what Congress intended to do – make sure that only eligible businesses Apply and get government incentives and credits.”
Firms offering employee retention tax credit services use different models. Some don’t have certified public accountants on staff and rely on lawyers, offshore workers or software to cut the numbers. Others rely on consumers to “certify” that they are eligible for tax credits, leaving those consumers more liable in the event of an audit.
Brian Anderson, who has a background in software, co-founded ERTC Express in 2021 after realizing that traditional accountants had no time to help their clients navigate the cumbersome process of applying for credit. do not have. His business, which has offices in Atlanta and Tampa, has a team of in-house accountants and a more rigorous monthly process to determine whether a client is eligible to apply. Customers can either pay an upfront fee or a percentage of their final refund.
“Are you eligible, that’s a difficult question to answer,” Mr. Anderson said, estimating that about a third of his potential clients don’t. “If you’re not qualified, it’s a lot of work.”
The IRS recognizes that applying for tax credits is a complicated process, made more difficult by the fact that it must be done by amending previous tax returns using paper forms. The agency warns that firms that say the process can be completed quickly and easily are potentially misleading their customers.
Traditional accountants are watching with concern as applications for employee retention tax credits increase. Many have since been hired to help taxpayers who suddenly find themselves under IRS scrutiny.
“These guys are hunting people, promising the moon,” said Mark C. Wagner, an accountant based near Dallas. “If your sales don’t meet the credit criteria, you have to pay back the credit, plus interest.”
A lawyer for Mr. Bassett, who pleaded not guilty, said COS Accounting & Tax took seriously its obligations to comply with IRS requirements when applying for benefits for its clients. The lawyer, Kathryn Nestor, explained that regulations and guidance on credit were “often unclear and frequently revised.”
This has provided little comfort to business clients seeking answers to their requests or left to contest audits.
Wanchai Chab was working for a Utah company selling pest control supplies in California in 2020. Because he had set up a limited liability company, he was advised that he could apply for employee retention tax credits through COS Accounting and Taxation. He paid $500 up front and was told he would receive a $3,500 credit.
But instead of getting a big refund, Mr Chubb, 25, received an audit notice earlier this year and had to pay extra tax.
Fortunately for Mr. Chabb, he was not penalized by the IRS because he never received the credit.
“The auditor said she understands what’s going on and that she knows of a lot of people who have been ripped off that way,” Mr. Chubb said.