Unmasking the Firms Exploiting Employee Retention Credits

COS Accounting and Tax, an accounting firm, was accused of cheating the US government out of millions of dollars in February. The Employee Retention Credit, a tax benefit created as part of the initial $2 trillion pandemic relief legislation, 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. However, the money 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 I.R.S.

Although the public health emergency is over, taxpayers can continue to apply for the tax credit until 2025, fueled by a run for the money and the proliferation of financial service providers. The tax credit has become far more costly than expected, with the Congressional Budget Office projecting that it would cost the federal government about $85 billion over a decade. The I.R.S. is now ramping up efforts to root out scams and focusing additional scrutiny on filings from firms that appear suspicious. The I.R.S. is aggressively auditing taxpayers who collected refunds and the firms that processed them, with hundreds and possibly thousands of tax credit “mills” popping up across the country in the last three years.

The Employee Retention Credit (ERC) is a tax credit that can provide a substantial windfall in the form of a tax refund for eligible taxpayers. 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 partly 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 I.R.S. is concerned that firms processing applications for the credit at high volume are overlooking important restrictions in order to rake in bigger refunds and commissions.

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 on June 5 and has resorted to accounting maneuvers so that it can keep paying its bills.

Treasury officials last month pointed to the Employee Retention Credit payouts as a reason that federal tax revenues are more meager than expected. Lawmakers have been debating clawing back some unused pandemic relief funds as part of the debt limit and budget negotiations, but the tax credit does not appear to be part of those discussions.

More applications for tax credits are coming in every day as firms continue to blitz social media sites and TV and radio stations with ads touting the ease of getting federal money. In some cases, the firms are cold-calling potential customers.

Firms providing 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 “attest” that they are eligible for the tax credits, leaving those customers more liable in the event of an audit.

The I.R.S. acknowledges that applying for the tax credit is a complicated process, made more difficult by the fact it must be done by amending previous tax returns using paper forms. The agency cautions that firms that say the process can be accomplished quickly and easily are likely misleading their customers.

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