In early February, federal prosecutors in Utah filed charges. Zachary Bassett and Mason Waugh The crime of cheating the U.S. government out of millions of dollars. Prosecutors said the accounting firm they operated had filed more than 1,000 fraudulent tax returns with the Internal Revenue Service on behalf of companies seeking to claim pandemic-era stimulus funds. .
The COS Office of Accounting and Taxation closed later that month, leaving businesses and taxpayers who were paying the office to help claim federal funds wonder what happened and why they suddenly received an audit notice from the IRS. was trying to elucidate
As the 2020 pandemic hit and much of the economy went into lockdown, Washington state launched a variety of programs to help keep businesses and employees afloat. Among them are employee retention credit, a tax incentive created as part of the first $2 trillion Pandemic Relief Act. The program offered thousands of dollars per employee if companies could prove that COVID-19 was hurting their bottom line and that they were still paying their employees.
The money was intended to be a lifeline for the struggling company. Instead, it has become a magnet for fraud, creating a cottage industry of companies that advertise themselves as tax credit experts who can help their customers, even those who are not actually eligible. Even after the emergency ends, taxpayers can continue to claim tax credits until 2025. This has fueled a money scramble and a proliferation of financial service providers, often charging hefty upfront fees and reducing tax rebates by about 25%.
Tax credits have become so popular that they are proving to be much more expensive than expected. In 2021, after Congress expanded credit eligibility, he Congressional Budget Office Forecast It will cost the federal government about $85 billion over the decade, up from $55 billion previously estimated. But even that turned out to be an underestimate. The IRS said it has already paid out $152 billion in refunds related to tax credits since the credits first became available, leaving about 800,000 claims pending to process. .
The IRS does not yet know how many of the refunds approved were based on fraudulent claims. However, it has begun stepping up its efforts to root out fraud and is focusing more scrutiny on submissions from companies it deems suspicious.
On Thursday, the IRS said issued a warning It called on businesses to be vigilant against “fraud” related to tax credits, saying the credits were fueling a flood of “invalid” claims.
“They are the Johnny Camry who just came along, promoting this product and promoting this activity in an unethical manner,” IRS Deputy Commissioner for Services and Enforcement Douglas O’Donnell said in an interview. rice field. . “It traps companies and demands credit to which they do not have rights.”
O’Donnell warned that those who received a refund but were not eligible for the money would have to return the money with penalties. He said the IRS actively audits taxpayers who collect refunds and companies that process them. He estimates that hundreds of thousands of tax credit “mills” have popped up across the country in the past three years.
“They seem to be everywhere,” says O’Donnell.
This tax credit is not as well-known as the more popular Paycheck Protection Program, which offers waiverable loans to cover payroll, rent and utilities during the pandemic. However, for eligible taxpayers, there can be significant benefits in the form of tax refunds. Businesses, including non-profits and churches, will be fully or partially shut down for some part of 2020 or 2021 and can report a significant drop in revenue during that time, up to You can claim $26,000.
But the finer points of determining whether a company qualifies are complex, and the IRS has overlooked important restrictions for companies processing high volumes of credit applications to earn larger refunds and fees. I am afraid that there are
For example, the IRS is concerned about taxpayers spending multiple bailouts, and many tax preparation firms say they don’t tell their customers about it. You cannot claim tax credits on your salary If you also received money to cover payroll costs through the Paycheck Protection Program.
Soaring program costs are exacerbating America’s precarious financial situation. The White House and Republican lawmakers are embroiled in a heated battle over raising the debt ceiling, which limits how much the United States can borrow. The Treasury Department estimates that the government’s cash reserves could be depleted as early as June 1, and is relying on fiscal manipulation to continue paying bills.
Treasury officials last month cited employee retention credit payments as a reason for lower-than-expected federal tax revenues.
Lawmakers are discussing recovering some of the unspent pandemic relief funds as part of debt restraint and budget negotiations, but tax credits don’t appear to be part of that discussion. Senator Kirsten Gillibrand, a New York Democrat, wrote to the IRS earlier this month, asking them to clear the arrears and issue refunds sooner.
Claims for tax credits are increasing by the day, as companies continue to flood social media sites, TV and radio stations with ads touting easier access to federal funds. In some cases, a company may call a potential customer.
About 9,000 ads promoting employee retention tax credit application services have run on cable and broadcast television networks nationwide since October, according to ad-tracking firm Vivix/CMAG.
About three-quarters of them are sponsored by Innovation Refunds, one of the industry’s largest companies, which advertises on networks such as CNBC, which determines if applicants are eligible. It claims to take just eight minutes to do. The company says it has helped companies claim more than $1 billion in payroll tax refunds.
“It’s very easy,” says the narrator in one ad. “However, it is only available for a limited time.”
Innovation Refunds collects 25% of the refunds customers receive from the IRS and utilizes a network of tax attorneys to review applications and process forms. It received funding from investment firm Raistone to expand its ability to advertise and process more amended returns.
“If you don’t have the knowledge, you’re not going to look for it,” says Mireille Roselli, a spokeswoman for Innovation Refunds. “We’re on the shot clock.”
Roselli added that the Innovation Refund has a strict application review system. “Our process is designed to fulfill Congress’ intent to ensure that only eligible businesses can apply for and receive government incentives and credits.”
Companies that provide employee retention tax credit services use a variety of models. Some companies don’t have CPAs on staff and instead rely on lawyers, offshore workers, or software to calculate the numbers. Some companies also rely on their customers to “prove” that they are eligible for tax credits, putting even more liability on the customer in the event of an audit.
With a background in software, Brian Anderson co-founded ERTC Express in 2021 after learning that traditional accountants didn’t have time to help clients through the tedious process of applying for credit. His business, which has offices in Atlanta and Tampa, has a team of in-house accountants and his more rigorous month-long process to determine if a client is eligible to apply. Customers can pay an upfront fee or pay a portion of the final refund.
“Finding the answer to the question, are you eligible?” says Anderson, who estimates that about a third of potential customers are not. “If you don’t have the qualifications, it’s going to be a lot of wasted effort.”
The IRS acknowledges that claiming a tax credit is a complex process, made even more difficult by the need to amend previous tax returns using paper forms. The agency warns that companies claiming the process can be completed quickly and easily may be misleading customers.
Traditional accountants are voicing concerns as applications for employee retention tax credits surge. Then many people were hired to help taxpayers who suddenly came under IRS scrutiny.
“These guys are preying on people by promising the moon,” said Mark C. Wagner, an accountant based near Dallas. “If the sales do not meet the credit criteria, you will have to repay the credit plus the fine and interest.”
Bassett’s attorneys, who pleaded not guilty, said COS Accounting and Taxation takes seriously its responsibility to comply with IRS requirements when applying for client benefits. Lawyer Kathryn Nestor said credit regulations and guidance were “often unclear and frequently revised.”
This was of little consolation to enterprise clients looking for answers on their applications or left to battle audits.
Wanchai Chub worked for a Utah-based company that sells pest control products in California in 2020. Since he had set up a limited liability company, he was advised that he could apply for an employee retention tax credit through COS accounting and taxation. He was told up front he would pay $500 and get $3,500 in credit.
But instead of receiving a large refund, Chubb, 25, received an audit notice earlier this year and ended up having to pay additional taxes.
Luckily for Mr. Chubb, he received no credit and was not penalized by the IRS.
“The auditors said they understand what’s going on and they know a lot of people who have been ripped off like this,” Chubb said.
