How pandemic-era software became a magnet for fraud

In early February, Utah federal prosecutors charged Zachary Bassett and Mason Warr with defrauding the US government of millions of dollars. The accounting firm they run, the plaintiffs said, has submitted more than 1,000 fraudulent tax forms to the Internal Revenue Service on behalf of companies trying to claim stimulus money in the era of the pandemic.

COS Accounting and Taxes closed later that month, leaving the companies and taxpayers who had paid the company to help them claim federal money trying to figure out what happened and why they were suddenly receiving audit notices from the IRS.

Amid the onset of the pandemic in 2020, with large swathes of the economy going into lockdown, Washington has put in place various programs to help keep businesses and their workers afloat. Among them was the Employee Retention Credit, a tax benefit created as part of the initial $2 trillion pandemic relief legislation. The program has offered companies thousands of dollars per employee if they can show that Covid-19 is hurting their bottom line and that they continue to pay workers.

The money was intended as a lifeline for struggling companies. Instead, it has become a magnet for fraud, creating a cottage industry of companies that market themselves as tax credit professionals who can help clients—even those who don’t already qualify for the money—earn huge amounts of money from the IRS despite the public health over state of emergency, and taxpayers can continue to apply for the tax credit until 2025. This has led to a rush of money and a proliferation of financial service providers, who often charge huge upfront fees or cut about 25 percent of any tax refund.

The tax credit has become so popular that it has become more expensive than expected. In 2021, after Congress expanded eligibility for the credit, the Congressional Budget Office projected it would cost the federal government about $85 billion over a decade — higher than a previous estimate of $55 billion. However, that turned out to be an understatement: The IRS said it has already paid out $152 billion in refunds associated with the tax credit since it first became available and has about 800,000 backlogs it’s trying to process.

The IRS does not yet know how many refunds have been approved based on fraudulent applications. But it has begun to ramp up efforts to root out fraud and focus additional scrutiny on filings from companies that appear suspicious.

On Thursday, the IRS issued a warning to businesses to be on the lookout for tax credit “scams,” saying they are fueling a flood of “invalid” applications.

“These are Johnny Ate Latelis, showing up pushing this product, pushing this activity in an unethical way,” Douglas O’Donnell, IRS Deputy Commissioner for Services and Enforcement, said in an interview. . “It lures companies into a trap, where they will then demand loans that they are not entitled to.”

Mr. O’Donnell warned that those who received refunds but did not qualify for the money would have to pay back the money with penalties. He said the IRS was conducting rigorous scrutiny of the taxpayers who collect the refunds and the companies that process them. He estimated that hundreds of thousands of tax credit “mills” had sprung up across the country in the past three years.

“They seem to be everywhere,” said Mr. O’Donnell.

The tax breaks are less well-known than the more popular Paycheck Protection Program, which has offered revocable loans to cover payroll, rent and utility expenses during the pandemic. But for eligible taxpayers, they have the potential to provide a significant windfall in the form of a tax refund. Companies, including nonprofits and churches, can seek up to $26,000 per employee on payroll if they can show that their operations were suspended in whole or in part in 2020 or part of 2021, and report a significant decrease. in its revenues during that time.

However, the fine details that determine whether a company qualifies are complex and the IRS is concerned that companies that process credit applications in bulk ignore important restrictions in order to get larger refunds and commissions.

For example, the IRS is concerned about taxpayers dipping into multiple pots of relief money and says many tax preparation companies don’t tell customers they can’t claim the wage tax credit if they also receive money for payroll costs through the Paycheck Protection Program. .

The inflated cost of the program exacerbates America’s precarious financial situation. The White House and Republican lawmakers are locked in a bitter battle over raising the debt ceiling, which limits how much money the United States can borrow. The Treasury estimated that the government might run out of cash as soon as 1 June and resorted to accounting maneuvers so that it could continue to pay its bills.

Treasury officials last month cited employee retention credit payments as the reason that federal tax revenues are lower than expected.

Lawmakers have been discussing getting some unused pandemic relief money back as part of debt limits and budget negotiations, but a tax credit does not appear to be part of those discussions. Sen. Kirsten Gillibrand, D-NY, sent a letter to the IRS this month urging it to clear the backlog and issue refunds faster.

More requests for tax breaks come each day as companies continue to fire up social media sites and TV and radio stations with ads touting easy access to federal funds. In some cases, companies contact potential customers.

Since last October, there have been about 9,000 ads promoting app services for employee retention tax rebates airing on national television and broadcast television networks, according to ad-tracking firm Vivvix/CMAG.

About three-quarters of those were sponsored by one of the industry’s biggest players, Innovation Racks, which advertises on networks like CNBC and claims the company takes just eight minutes to determine whether an applicant qualifies. The company says it has helped companies claim more than $1 billion in payroll taxes.

“It’s easy,” says the narrator in one of the advertisements. “But it is only available for a limited time.”

Innovation Refunds, which takes 25 percent of the refund a customer receives from the IRS, uses a network of tax attorneys to review applications and process forms. It has received funding from investment firm Raistone to expand its ability to advertise and process more amended tax returns.

“If you don’t have the knowledge, you won’t be looking for it,” said Mireille Rosselli, a spokeswoman for Innovation Products. “We are around the clock.”

Recovered Innovation has a rigorous system for vetting applications, Ms. Roselli added: “Our process is designed to deliver what Congress intends to do — making sure that only eligible companies apply for and receive government incentives and credits.”

Companies that provide tax credit services for employee retention use different models. Some don’t have certified public accountants on staff and rely instead on lawyers, outsourcing workers, or software to crunch the numbers. Others rely on customers to “prove” that they qualify for tax credits, making those customers more liable in the event of an audit.

Brian Anderson, with a background in software, co-founded ERTC Express in 2021 after learning that traditional accountants didn’t seem to have the time to help their clients navigate the grueling process of applying for credits. His firm, with offices in Atlanta and Tampa, has a team of in-house accountants and a more rigorous, month-long process for determining if a client qualifies to apply. Customers can either pay an upfront fee or a percentage of their final refund.

“It is complicated to know the answer to the question, Are you qualified?” said Mr. Anderson. He estimates that about a third of his potential clients are unqualified. “If you don’t qualify, it will be a lot of work for nothing.”

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

Traditional accountants watched anxiously as applications for the employee retention tax credit rebounded. Many have since been hired to help taxpayers who suddenly find themselves under the watch of the IRS.

“These guys prey on people, and they promise the moon,” said Mark C. Wagner, an accountant located near Dallas. “If your sales don’t meet the credit criteria, you have to repay the credit, plus penalties, plus interest.”

Bassett, who has pleaded not guilty, said COS Accounting and Taxes take their responsibilities seriously to comply with IRS requirements when applying for benefits for their clients, said an attorney for Mr. Bassett. Regulations and guidance around credit “were often not clear and frequently revised,” explained the attorney, Katherine Nester.

This offered little solace to business clients who were either searching for answers on their requests or left to deal with audits.

Wanchai Chab was working for a Utah-based company selling pest control supplies in California in 2020. Because he set up an LLC, he was advised that he could apply for an employee retention tax credit through COS Accounting and Tax. He paid $500 upfront and was told he would receive a $3,500 credit.

But instead of a large refund, Mr. Chapp, 25, received an audit notice earlier this year and ended up paying additional taxes.

Fortunately for Mr. Young, he wasn’t penalized by the IRS because he never got the credit.

“The auditor said she understood what was happening and knew a lot of people who stole in this way,” said Mr. Chapp.

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