WASHINGTON (AP) — A shocking report revealed that about 95% of the claims for a COVID-era tax break by businesses were fraudulent. IRS Commissioner Danny Werfel confirmed this assessment during a private meeting with senators, prompting calls to wind down the program known as the employee retention tax credit, which was created as an incentive for businesses to retain their workers during the pandemic.
The demand for the credit surged as Congress extended it to more companies, leading to a significant increase in claims. Aggressive marketing tactics promising large refunds to businesses fueled the rise of potentially fraudulent claims. Originally estimated to cost the government $55 billion, the program’s expenses have grown to nearly five times that amount as of July, with new claims adding to the increasing cost that lawmakers are eager to cap.
Lawmakers across the political spectrum, including Senator Elizabeth Warren, D-Mass., and Senator Ron Johnson, R-Wis., agree that it’s time to terminate the program due to pervasive fraud. The Joint Committee on Taxation projects that ending the program sooner and imposing harsher penalties on companies promoting improper claims could generate about $79 billion over 10 years. The savings would be used to offset the cost of three business tax breaks and enhance the child tax credit for many low-income families. Families benefiting from the changes would see an average tax cut of $680 in the first year.
Although the package received overwhelming support from a House committee, there are concerns among key senators that may impact its passage through Congress. Under current law, taxpayers have until April 15, 2025, to claim the employee retention credit, but the proposed bill would halt new claims after January 31, 2022. It would also impose severe penalties on those promoting the employer retention tax credit if they knowingly lead to underreporting of tax liabilities.
The tax break, initially worth up to $26,000 per employee, was introduced to assist businesses affected by the pandemic. To be eligible, businesses must demonstrate a pandemic-related government order that led to their closure or reduced operations, or a significant decline in revenues. However, there have been concerns about the lack of documentation and oversight, leading to widespread abuse of the program.
The IRS temporarily stopped accepting claims for the tax credit in September 2021 due to mounting concerns about fraudulent applications after receiving 3.6 million claims. Significant fraud cases have emerged, such as a tax preparer in New Jersey who fraudulently sought over $124 million from the IRS by filing more than 1,000 tax returns claiming employment tax credits. As of December 31, the IRS had initiated 352 criminal investigations involving potentially fraudulent claims totaling over $2.9 billion and nine civil investigations of marketers that may have misled employers on claim eligibility.
The IRS has implemented measures to address fraud, such as a special withdrawal program for unprocessed claims and a voluntary disclosure program for those who believe they were improperly paid. These actions have already led to a 40% decline in weekly claims. Lawmakers believe that reducing fraudulent claims will enable the IRS to expedite the resolution of legitimate claims still pending. Despite the challenges in passing major legislation during an election year, the overwhelming consensus among lawmakers is to terminate the troubled program.
In conclusion, the employee retention tax credit, while well-intentioned, has become a target for widespread fraud, prompting calls for its closure on Capitol Hill.
