How the Employee Retention Tax Credit Became a Magnet for Fraud

The Employee Retention Credit, a tax benefit intended to help keep businesses afloat during the pandemic, has become a magnet for fraud. Eligible businesses can claim up to $26,000 per employee if they can demonstrate Covid-19 is hurting their bottom line and they are continuing paying their employees. However, the small-print needs to be followed, and many firms that market themselves as tax credit specialists are overlooking important restrictions to try to extract higher refunds and commissions by reviewing multiple pots of relief money. The sheer volume of applications is heightening opportunities for fraudulent activity, fueling a flood of invalid applications as the deadline approaches for funds.

Washington established a variety of pandemic programs in 2020 to keep businesses afloat. Among them was the Employee Retention Credit. The program 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 to keep them afloat.

The money was intended to be a lifeline for struggling companies. Instead, it 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 actually qualify for the money—reap huge refunds from the I.R.S. The I.R.S. warned that those who received refunds but were ineligible for the money would have to repay the funds with penalties. He said the I.R.S. was aggressively auditing taxpayers that collected refunds and the firms that processed them.

The Employee Retention Credit payouts are a reason that federal tax revenues are more meager than expected. The ballooning cost of the program is exacerbating America’s precarious fiscal situation. The tax credit does not appear to be a part of discussions about clawing back some unused pandemic relief funds as part of the debt limit and budget negotiations. Mireille Rosselli, a spokeswoman for Innovation Refunds said that if “you don’t have the knowledge, then you’re not going to seek this out”. 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. Traditional accountants have been watching with concern over the trend.

The I.R.S. is ramping up measures to find scams and focusing additional scrutiny on filings from firms who appear suspicious. It advised businesses to be on the lookout for “scams” related to the tax credit on Thursday, saying it was fueling a flood of “invalid” applications, as hundreds and possibly thousands of tax credit “mills” have popped up across the country in three years. The pandemic emergency is over, but taxpayers can continue to apply until 2025. This has fueled a riff for the money, leading to the proliferation of financial service providers charging hefty upfront fees or taking cuts of about 25% of any tax refund.



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