HomePoliticsHow a Pandemic-Era Program Became a Magnet for Fraud - UnlistedNews

How a Pandemic-Era Program Became a Magnet for Fraud – UnlistedNews

In early February, Utah federal prosecutors charged Zachary Bassett and Mason Warr of defrauding the United States government out of millions of dollars. The accounting firm they operated had filed more than 1,000 fraudulent tax forms with the Internal Revenue Service on behalf of businesses trying to claim pandemic-era stimulus funds, prosecutors said.

COS Accounting and Tax shut down later that month, leaving companies and taxpayers who had paid the company 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 start of the pandemic in 2020, when large swaths of the economy went into lockdown, Washington established several programs to help keep businesses and their workers afloat. Among them was the Employee Retention Credit, a tax break that was created as part of the initial $2 trillion pandemic relief legislation. The program offered companies thousands of dollars per employee if they could show that Covid-19 was hurting their bottom line and that they continued to pay workers.

The money was meant to be a lifeline for struggling businesses. Instead, it has become a magnet for fraud, creating a cottage industry of companies that market themselves as tax credit specialists who can help clients, even those who don’t actually qualify for the money, to get big refunds from the IRS. Although the public health emergency is over, taxpayers can continue to apply for the tax credit through 2025. That has led to a race for money and a proliferation of financial service providers, often charging steep fees up front or cutting around $25. percent of any tax refund.

The tax credit has become so popular that it is turning out to be much more expensive than expected. In 2021, after Congress expanded eligibility for the credit, the Projected Congressional Budget Office that would cost the federal government about $85 billion over a decade, up from a previous estimate of $55 billion. Even that turned out to be an underestimate, though: The IRS said it has already paid out $152 billion in refunds associated with the tax credit since it first became available and has a backlog of about 800,000 applications that it’s trying to process.

The IRS does not yet know how many of the approved refunds were based on fraudulent claims. But it has begun intensifying efforts to crack down on scams and focusing additional scrutiny on submissions from companies that appear suspicious.

On Thursday, the IRS issued a warning to companies 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-ladies, coming along and pushing this product, pushing this activity in a way that is unethical,” Douglas O’Donnell, IRS assistant commissioner for services and compliance, said in an interview. . “He is leading companies into a trap, which will then claim credit to which they are not entitled.”

Mr O’Donnell warned that those who received refunds but were not eligible for the money would have to repay the funds with penalties. He said the IRS was aggressively auditing taxpayers who collect refunds and the companies that process them. He estimated that hundreds of thousands of tax credit “factories” have sprung up across the country in the past 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 demonstrate that their operations were fully or partially suspended in 2020 or part of 2021 and report a significant decline in revenue during that time.

However, the fine print that determines whether a business is eligible is complicated, and the IRS is concerned that businesses that process high-volume credit applications are overlooking important restrictions to get higher refunds and fees.

For example, the IRS is concerned that taxpayers will be plunged into multiple sources of relief money and says that many tax preparation companies do not tell clients that cannot claim the tax credit on wages if they also received money to cover payroll costs through the Paycheck Protection Program.

The rising cost of the program is exacerbating America’s precarious fiscal situation. The White House and Republican lawmakers are locked in a bitter fight to raise the debt ceiling, which limits the amount of 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 to keep paying its bills.

Treasury officials pointed out last month that Employee Retention Credit payments are the reason federal tax revenues are tighter than expected.

Lawmakers have been debating recovering some unused pandemic relief funds as part of debt limit and budget negotiations, but the tax credit does not appear to be part of those discussions. Sen. Kirsten Gillibrand, D-N.Y., sent a letter to the IRS this month urging it to clear its backlog and issue refunds faster.

More applications for tax credits are arriving every day as companies continue to bombard social networking sites and television and radio stations with ads touting the ease of getting federal money. In some cases, companies are cold calling potential customers.

Since last October, about 9,000 ads promoting employee retention tax credit application services have aired on national cable and broadcast networks, according to ad-tracking firm Vivvix/CMAG.

About three-quarters of them were sponsored by one of the biggest players in the industry, Innovation Refunds, which advertises on networks like CNBC and claims it takes just eight minutes for the company to determine if an applicant is eligible. The firm says it has helped companies claim more than $1 billion in payroll tax refunds.

“It’s that easy,” says a narrator in one of the ads. “But it’s only available for a limited time.”

Innovation Refunds, which takes 25 percent of any refund a client receives from the IRS, uses a network of tax attorneys to review applications and process forms. It received funding from the investment firm Raistone to expand its ability to publish and process more amended tax returns.

“If you don’t have the knowledge, then you won’t be looking for this,” said Mireille Rosselli, a spokeswoman for Innovation Refunds. “We are on a shot clock.”

Ms. Rosselli added that Innovation Refunds has a rigorous application vetting system: “Our process is designed to do what Congress intended to do – ensure that only eligible businesses apply for and receive government incentives and credits.”

Companies that provide employee retention tax credit services use different models. Some do not have certified public accountants on staff and rely instead on lawyers, offshore workers or software to crunch the numbers. Others rely on customers to “certify” that they are eligible for tax credits, making those customers more liable in the event of an audit.

Brian Anderson, who has a background in software, co-founded ERTC Express in 2021 after learning that traditional accountants didn’t seem to have the time to help their clients navigate the cumbersome credit application process. His business, which has offices in Atlanta and Tampa, has a team of in-house accountants and a more rigorous month-long process to determine if a client is eligible to apply. Clients can pay a fee upfront or a percentage of their eventual refund.

“It’s hard to figure out the answer to whether you’re eligible,” Mr. Anderson said, estimating that about a third of his potential customers don’t qualify. “If you’re not eligible, it’s a lot of work for nothing.”

The IRS recognizes that applying for the tax credit 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 companies that claim the process can be done quickly and easily are likely misleading their customers.

Traditional accountants have been watching the boom in employee retention tax credit claims with concern. Since then, many have been hired to help taxpayers who suddenly find themselves under IRS scrutiny.

“These guys are taking advantage of people, promising the moon,” said Mark C. Wagner, an accountant who works near Dallas. “If your sales didn’t meet the criteria for the credit, then you have to repay the credit, plus penalties, plus interest.”

An attorney for Mr. Bassett, who has pleaded not guilty, said COS Accounting and Tax took seriously its responsibilities to comply with IRS requirements when applying for benefits for its clients. The lawyer, Kathryn Nester, explained that credit regulations and guidance “used to be unclear and frequently revised.”

That has brought little comfort to the company’s customers who have been searching for answers about their apps or dealing with audits.

Wanchai Chab worked for a Utah-based company selling pest control supplies in California in 2020. Because he had established a limited liability company, he was told he could apply for the Employee Retention Tax Credit through COS Accounting and Tax. She paid $500 up front and was told she would get a $3,500 credit.

But instead of getting a big refund, Mr. Chab, 25, received an audit notice earlier this year and ended up paying extra taxes.

Fortunately for Mr. Chab, the IRS did not penalize him because he never received the credit.

“The auditor said she understood what was going on and knew of a lot of people who were scammed this way,” Chab said.


Sara Marcus
Sara Marcushttps://unlistednews.com
Meet Sara Marcus, our newest addition to the Unlisted News team! Sara is a talented author and cultural critic, whose work has appeared in a variety of publications. Sara's writing style is characterized by its incisiveness and thought-provoking nature, and her insightful commentary on music, politics, and social justice is sure to captivate our readers. We are thrilled to have her join our team and look forward to sharing her work with our readers.


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