WASHINGTON (AP) — When IRS Commissioner Danny Werfel met privately with senators recently, the chairman of the Senate Finance Committee asked for his assessment of a sensational report: A whistleblower estimated that 95% of claims now were made by companies for a COVID-era tax breaks were fraudulent.
“He looked at his shoes and basically said, 'Yes,'” recalled the lawmaker who asked the question, Sen. Ron Wyden, D-Ore.
The answer explains why Congress is moving to eliminate the so-called employee retention tax credit. Congress created the program during the coronavirus pandemic as an incentive for companies to keep their workers on payroll.
Demand for the credit skyrocketed as Congress extended the tax break and made it available to more businesses. Aggressive marketers promised business owners huge refunds if they would simply apply. As a result, the cost, expected to cost the federal government $55 billion, has increased nearly fivefold by July. Meanwhile, new claims are still pouring into the IRS every week, creating rising costs that lawmakers are striving to limit.
Lawmakers from across the political spectrum who rarely agree on anything else — from liberal Sen. Elizabeth Warren, D-Mass., to conservative Sen. Ron Johnson, R-Wis. – agree that it is time to close the program.
“I don’t know the exact number, but it’s almost universal fraud in the program. It should be stopped,” Johnson said. “I don’t understand how anyone could support that.”
Warren added: “The standards were too lax and the oversight was too thin.”
The Joint Tax Committee estimates that faster implementation of the program and higher penalties for companies making improper claims would raise about $79 billion over 10 years. Lawmakers want to use the savings to offset the cost of three corporate tax breaks and a more generous child tax credit for many low-income families. Households that benefit from the changes to the child tax credit would see an average tax cut of $680 in the first year, according to an estimate from the nonpartisan Tax Policy Center.
The package was approved by a House committee last week by an overwhelming majority (40-3), showing that it enjoys broad, bipartisan support.
However, passage by Congress is not assured as many key senators have concerns about certain aspects of the bill. Wyden said a strong vote in the House could prompt the Senate to take quicker action. Still, passing major legislation in an election year is generally a difficult task.
Under current law, taxpayers have until April 15, 2025 to claim the employee retention credit. The bill would bar new claims after January 31 of this year. It would also impose steep penalties on those who promote the employer retention tax credit if they know or have reason to believe that their advice will result in underreporting of tax liabilities.
When Congress created the tax break for employers at the start of the pandemic, it was so well received that lawmakers extended and changed the program three times. The credit, worth up to $26,000 per employee, can be claimed for wages paid through 2021.
To qualify, businesses generally must demonstrate that a local or state order related to the COVID-19 pandemic has required their business to close or partially cease operations. Or companies must prove that they have suffered a significant decline in sales.
Larry Gray, a certified public accountant from Rolla, Missouri, said he had concerns early on that the program could be abused.
“There was no real meaningful documentation” and the IRS simply mailed the checks, Gray said. “They just started printing the checks, and I think Congress wanted them to print the checks.”
According to the documents he examined, his assumption turned out to be correct. He has even lost clients who didn't want to hear that they weren't qualified even though others told them they were. In general, he said, the businesses that don't qualify fail to cite the state order that led to their closure or partial suspension. They also regularly give reasons for reimbursement that do not meet the program's criteria. For example, one company stated that it was having difficulty finding employees and needed to increase wages as a reason for qualifications.
“If I look at the narrative in the documents I've seen, any company in America would be eligible,” Gray said.
The IRS paused accepting tax credit applications in September last year until 2024 amid growing concerns that a flood of applications are fraudulent. At this point, 3.6 million applications had been received.
Some scams were widespread. For example, in July, a New Jersey tax preparer was arrested for fraudulently soliciting more than $124 million from the IRS when he filed more than 1,000 tax returns to claim the payroll tax credit.
In an update to the program released Thursday, the IRS said it has thousands of audits in the pipeline and that as of Dec. 31, it had opened 352 criminal investigations involving potentially fraudulent claims totaling more than $2, $9 billion went. Separately, nine civil investigations have been launched against marketers who may have misled employers about eligibility to make claims.
Werfel recently briefed the Senate Finance Committee on measures taken to combat the fraud, including the development of a special payout program for those with unprocessed claims and a self-disclosure program for those who believed they were unfairly paid. Since then, the IRS has seen an immediate 40% drop in average weekly claims, he said.
Lawmakers stress that reducing fraudulent claims should also help the IRS more quickly resolve legitimate claims that companies have filed and are still awaiting resolution. As of early December, the IRS had a backlog of about a million applications.
Congress regularly struggles to find compensation for new spending or tax cuts. But in this case, the employee retention tax credit appears to have few friends on Capitol Hill.
“Well-intentioned, but boy oh boy,” Sen. Mark Warner, D-Va., summed up the program.