How a pandemic-era show became a magnet for fraud

How a pandemic-era show became a magnet for fraud

In early February, federal prosecutors in Utah charged Zachary Bassett and Mason Warr with cheating the US government out of millions of dollars. The accounting firm they operated filed more than 1,000 fraudulent tax forms with the Internal Revenue Service on behalf of companies trying to claim pandemic-era stimulus funds, prosecutors said.

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

Amid the start of the pandemic in 2020, when large swaths of the economy went into lockdown, Washington created several 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 offered companies thousands of dollars per employee if they could show that Covid-19 was hurting their bottom line and that they continued to pay employees.

Cash should be 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 specialists who can help clients — even those who don’t qualify for the money — get huge refunds from the IRS. Once the emergency is over, taxpayers can continue to apply for the tax credit through 2025. That has fueled a rush for cash and the proliferation of financial services providers, who often charge hefty upfront fees or take cuts of around 25% of any refunds. of tax.

The tax credit has become so popular that it is becoming much 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 — up from the previous estimate of $55 billion. Yet even that turned out to be an understatement: The IRS said it has already paid $152 billion in refunds associated with the tax credit since it was first made available, and has a backlog of about 800,000 claims it is trying to process.

The IRS does not yet know how many of the approved refunds were based on fraudulent applications. But it has begun to step up efforts to root out fraud and focus closer scrutiny on records of companies that look suspicious.

On Thursday, the IRS issued a warning to companies to beware of “scams” related to the tax credit, saying it was fueling a flood of “invalid” applications.

“These are Johnny-come-latelies, showing up and they’re promoting this product, promoting this activity in an unethical way,” Douglas O’Donnell, deputy commissioner of services and enforcement for the IRS, said in an interview. . “This is luring companies into a trap, where they will be claiming credit to which they are not entitled.”

Mr. O’Donnell warned that those who received refunds but did not qualify for the money would have to repay the funds with penalties. He said the IRS is aggressively auditing taxpayers who receive refunds and the companies that process them. He estimated that hundreds of thousands of tax credit “factories” have sprung up across the country in the last three years.

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

The tax credits are lesser known than the more popular Paycheck Protection Program, which provided forgivable loans to cover payroll, rent, and utility expenses during the pandemic. But for qualified taxpayers, they have the potential to provide a substantial gain in the form of a tax refund. Businesses, including non-profit organizations and churches, can seek up to $26,000 for each employee on the payroll if they can show that their operations were fully or partially suspended in 2020 or part of 2021 and report a significant drop in their revenues during that period.

However, the fine print that determines whether a business is eligible is complicated, and the IRS is concerned that businesses that are processing high-volume credit applications are overlooking important restrictions in order to obtain higher refunds and commissions.

For example, the IRS is concerned about taxpayers dipping into various pots of relief money, and says that many tax preparation companies are not telling clients they cannot claim the payroll tax credit if they also receive money for cover payroll costs through the Paycheck Protection Program.

The rising cost of the program is exacerbating America’s precarious fiscal situation. The White House and Republican lawmakers are locked in a bitter fight over raising the debt ceiling, which limits how much money the United States can borrow. The Treasury Department has estimated that the government could run out of cash as early as June 1 and has resorted to accounting maneuvers to keep paying its bills.

Treasury officials last month pointed to Employee Withholding Credit payments as a reason federal tax revenues are thinner than expected.

Lawmakers have been debating recovering some unused pandemic relief funds as part of debt cap and budget talks, but the tax credit doesn’t appear to be part of those discussions. Senator Kirsten Gillibrand, Democrat of New York, sent a letter to the IRS this month urging it to clean up its order book and issue refunds more quickly.

More claims for tax credits are pouring in every day as companies continue to bombard social media sites and radio and TV stations with advertisements touting the ease of obtaining federal money. In some cases, companies are calling potential customers.

Since last October, there have been about 9,000 ads promoting application services for employee withholding tax credits running on national cable and broadcast television networks, according to ad tracking firm Vivvix/CMAG.

About three-quarters of those were sponsored by one of the biggest players in the industry, Innovation Refunds, which advertises on networks like CNBC and says it takes just eight minutes for the company to determine whether a candidate is eligible. The company says it has helped companies claim more than $1 billion in payroll tax refunds.

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

Innovation Refunds, which receives a 25% reduction on any refund a customer receives from the IRS, uses a network of tax attorneys to review claims and process forms. 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’re not going to look for it,” said Mireille Rosselli, a spokeswoman for Innovation Refunds. “We are on a shot clock.”

Mrs. Rosselli added that Innovation Refunds has a rigorous application verification system: “Our process is designed to deliver what Congress intends to do – ensure that only qualified companies apply and receive government incentives and credits.”

Companies that provide employee withholding tax credit services use different models. Some don’t have certified public accountants on staff and instead rely on lawyers, offshore workers or software to crunch the numbers. Others rely on clients to “certify” that they are eligible for the tax credits, leaving those clients more responsible in the event of an audit.

Brian Anderson, who has 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 go through the complicated process of applying for credits. His business, which has offices in Atlanta and Tampa, has an in-house team of accountants and a more rigorous month-long process for determining whether a client is eligible to apply. Customers can pay an upfront fee or a percentage of their eventual refund.

“Finding out the answer to the question of whether you qualify is complex,” said Mr. Anderson, estimating that about a third of his prospects do not qualify. “If you’re not eligible, it’s a lot of work for nothing.”

The IRS recognizes that applying for the tax credit is a complicated process, made 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 to mislead their customers.

Traditional accountants have been watching with concern the rise in employee retention tax credit claims. Many have already been hired to help taxpayers who suddenly find themselves under the scrutiny of the IRS.

“These guys are attacking people, promising the moon,” said Mark C. Wagner, an accountant who lives near Dallas. “If your sales don’t meet the credit criteria, you’ll have to pay the credit back, plus penalties, plus interest.”

A lawyer for Mr. Bassett, who pleaded not guilty, said COS Accounting and Tax took seriously its responsibilities to comply with IRS requirements when applying for benefits for its clients. The attorney, Kathryn Nester, explained that the regulations and guidelines around credit “were not always clear and were revised frequently”.

This provided little solace for the company’s customers who were looking for answers about their applications 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 had started a limited liability company, he was told he could claim the employee withholding tax credit through the COS Accounting and Tax. He paid $500 upfront and was told he would receive a $3,500 credit.

But instead of getting a big refund, Chab, 25, received an audit notice earlier this year and ended up having to pay additional taxes.

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

“The auditor said she understood what was going on and knew of many people who had been misled in this way,” Chab said.


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