Tax professionals and other experts testified during a congressional hearing about the Employee Retention Tax Credit and the issues they and their clients are facing amid constant sales pitches overpromising hefty tax refunds to employers, despite processing delays and vetting by the Internal Revenue Service for rampant fraud.
One lawmaker, Rep. Suzan DelBene, D-Washington, asked during Thursday's House Ways and Means Oversight Subcommittee hearing how fraudulent applications are impacting small businesses that unknowingly apply through so-called "ERTC mills."
"Eventually if they are subject to an audit, it could ruin them because by the time the IRS comes in and makes the determination that they weren't qualified, this huge sum of money that's probably being infused back into the business is no longer sitting in the checking account," said Roger Harris, president of Padgett Business Services. "And yet, the solution is you have to pay that back, most likely with penalties and interest, so the joy of getting the money could very quickly be replaced with the terrifying reality that because you weren't eligible, you could be put out of business because of the amount of money you now owe back to the federal government."
He pointed out that the ERC mills may not be around to help their clients with an audit in future years.
"One disadvantage for small businesses that use a third-party mill with questionable practices is that if they are eventually audited, they will be asked to furnish documentation on how they qualified for the ERTC and how the claimed credit was calculated," said Harris in his prepared remarks. "If this background documentation has not been provided to the business, then they could very likely be unable to demonstrate to the IRS how they qualified for and calculated the credit. As businesses are audited in future years, many of the third-party mills could very likely no longer be in existence."
Larry Gray, government liaison at the National Association of Tax Professionals and a partner at AGC CPA in Rolla, Missouri, cited the kinds of promotions he had come across.
"Today we are dealing with aggressive and misleading ERC advertising in print, on the radio, and on television," he said in his prepared remarks. "It is everywhere. I have gone through the process of contacting a few of the solicitors and have spoken with some of them on the phone. I have used actual information from one or more of my small businesses that I know for certain does not qualify for ERC; however this is not what I am being told by the third-party ERC mills I have communicated with. In general, they do not ask the right questions, based on the eligibility requirements to qualify as an eligible employer. Specifically, they ask nothing about any government-mandated shutdown in my area, and in all cases, they say my business qualifies for ERC."
He cited the example of a not-for-profit that had contacted him this week after realizing they had made a mistake. He urged the lawmakers to have the IRS provide some relief in such cases. "Don't let that interest and penalty run," he said. "Have that amnesty. Have a process for how to come clean."
Linda Czipo, president and CEO of the New Jersey Center for Nonprofits, elaborated further on the challenges for nonprofit organizations. She believes more clarity needs to be provided on the credit to avoid confusion with other pandemic relief programs like the Paycheck Protection Program.
"We still hear from nonprofits that think that because they got PPP, they're not eligible for the ERTC," she said. "Of course, that was the case at the beginning, but then it was changed. With more clarity with respect to what those requirements are and what it means to have a reduction in gross receipts, the more information they have at the outset that's clear, then they're more equipped to apply and get the relief that they need sooner. There's no question that education is absolutely key to this process, and it will help to stave off all of the bad actors that we've been talking about."
Delays for the eligible
Rep. Brian Fitzpatrick, R-Pennsylvania, said his office has been inundated with complaints from constituents about delays in receiving their tax refunds from the IRS.
"The volume of casework that my office has received on the ERTC issue since January alone has been mind-boggling," he said. "The inquiries my office submitted were on behalf of a whole range of organizations, including veterans organizations, small businesses, senior homes, just to name a few. One of my constituents was owed almost $300,000 and needed it immediately in order to keep their business doors open. Another constituent had difficulty getting the IRS to even confirm that they have received their application. Lastly, my office received in one instance a complaint from a constituent who had applied for the ERTC for the years 2020 and 2021, but never received the credit until the end of 2022. Most small businesses do not have the luxury of time when it comes to these issues."
Gray noted that he often deals with the IRS's National Taxpayer Advocate and National Public Liaison offices to assist with the issue, but they have limited capacity. "One of the things that's missed by the small preparer in the small communities is that the Taxpayer Advocate actually will assist the tax professional, but they're being overrun with requests," he pointed out.
He believes the IRS needs to communicate better about the ERC and update its FAQs and guidance.
The IRS instead seems to be preparing to move more aggressively on ERC compliance with new procedures to deter fraud, with Commissioner Daniel Werfel saying during a press conference Wednesday that the agency has largely cleared its backlog of delayed returns (
Pat Cleary, president and CEO of the National Association of Professional Employer Organizations, would like to see technology improvements at the IRS to handle the flood of ERC claims and amended returns.
"They need technology," he said during the hearing. "Our members mail stuff, and they fax stuff. And when we come and talk to your young staff about the problems we have, we have to tell them what a fax machine is first, and then go from there. They are using fax machines and mail, not email. That's just the first shot out of the box, to improve technology."
