This story has been updated with comments from the IRS.
Larry Pon was driving home from the gym following a workout in Redwood City, California, when the too-good-to-be-true barrage began. He was glued to a local sports radio station, digesting the latest baseball disaster for the San Francisco Giants. But over the course of an hour, he heard four different commercials from four different companies advertising a lucrative tax break for small business owners.
That Sept. 18 wasn't the first time Pon, a certified public accountant, had heard aggressive pitches on the airwaves for the employee retention credit, a multibillion-dollar federal program that's part of roughly $1.7 trillion in
"It's usually a guy shouting, 'you're entitled to $28,000 per employee!' in that really annoying voice," Pon said. Seedy marketers of the tax credit "are buying time on all the stations — it's a nationwide thing. There's a cottage industry of ERC mills."
In fact, fraudulent claims of the credit could be one of — if not the — largest tax-related scams in U.S. history.
According to a little-noticed
"Any program with this much cash and publicity can lead to fraud and abuse," said Perry Green, the chief financial officer and senior wealth strategist for Waddell & Associates, an independent advisory firm in Memphis, Tennessee.
Free government cash
When free government money is on the table, good financial advisors and accountants help clients determine if they're eligible to receive it. At the same time, advisors have to protect their customers from shadowy consultants and middlemen who pop out of the woodwork to angle for a cut of the take, regardless of whether or not a taxpayer they hook up is eligible.
The ERC program aimed to incentivize small businesses, the backbone of the American economy, to keep full-time employees on payroll during the pandemic, instead of laying them off as the economy severely contracted and businesses faltered or closed due to consumers staying home or losing their own jobs. The credit is essentially a rebate to businesses that reimburses them for paying employee salaries. It is refundable, meaning that if a taxpayer doesn't owe any federal tax, she can receive a refund from the IRS. Akin to free cash, it's one of the most valuable forms of tax benefits, and advisors catering to small business clients are widely aware of it, with many practices offering commentary on their websites.
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Most taxpayers became
Fraudulent and inaccurate payments are an issue because even though the program has ended, a business can file an amended tax return, known as Form 941-X, claiming the credit. The IRS had a backlog of roughly 207,000 unprocessed amended returns claiming the benefit, according to an
The deluge of marketing enticements glosses over the complicated rules of the credit, which emerged in March 2020 as part of the CARES Act, a roughly $2.2 trillion federal package that President Donald Trump signed to combat economic fallout from the COVID-19 pandemic. The credit was extended through June 2021 under the Consolidated Appropriations Act of 2021, which allowed employers who had gotten forgivable Paycheck Protection Program loans to apply for it. Last March, the American Rescue Plan extended the benefit through 2021 and made a new category of business — a "recovery startup business" launched during the pandemic — eligible.
"With the various eligibility requirements and many unfamiliar practitioners, misuse was inevitable," said Jessica Nelson, a certified public accountant, chartered financial analyst and financial advisor at Altfest Personal Wealth Management in New York.
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The TIGTA
The complex
The shilling by ERC promoters, most of whom are not licensed accountants or credentialed financial advisors, has given the latter two professions a lot to counter.
ERC "mills"
Mike Sylvester, an accountant in Fort Wayne, Indiana, recently
It all means that advisors with small business clients may have to haul out some cold water.
"This is a particularly lucrative credit for small business owners, and they're the most likely to get audited," said Mack Bekeza, a certified financial planner at Accelerated Wealth in Colorado Springs, Colorado. "Advisors should always make sure you have the right documentation and do it (take the credit) with strong reasoning."
ERC mills appear to have caught the attention of the IRS. Dan Chodan, a partner at Trout CPA in Lancaster, Pennsylvania,
IRS is now watching
Bruce Friedland, an IRS spokesman, said in a statement that "With any new tax law, the IRS conducts training for examiners on how to successfully examine the issue. In order to conduct examinations of Employee Retention Credit claims as efficiently as possible, we are training groups of agents on the Employee Retention Credit." He called the benefit "an important source of relief for small businesses in need of assistance," adding that "the IRS takes fraudulent claims of pandemic relief funds very seriously." The agency will get $
The Joint Committee on Taxation, the nonpartisan scorekeeper of Congress, initially estimated that the ERC program would cost around $55 billion. Expansions of the credit ramped the total up to around $85 billion. The total cost "remains uncertain," the Congressional Budget Office
The PPP program, also aimed at helping pandemic-hit businesses, is
Waddell's Perry said that he had several large and small employers who have claimed the credit.
"In each case, they used outside accounting or law firms to file the claims and kept careful, detailed records," he said, adding that they filed their claims "with the expectation of being audited."
