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House Oversight Subcommittee Hears About Employee Retention Credit Problems

S.J. Steinhardt
Published Date:
Jul 31, 2023

The U.S. House of Representatives’ Committee on Ways and Means’ Subcommittee on Oversight recently held a hearing on the issues faced by tax professionals and other interested parties concerning the Employee Retention Credit (ERC).

The ERC is a refundable tax credit for businesses that continued to pay employees while shut down due to the COVID-19 pandemic or that had significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021. The IRS has acknowledged delays in processing ERC claims. Last week, IRS Commissioner Daniel Werfel said that the tax agency had cleared its backlog of outstanding claims and would shift the available resources to combatting fraudulent claims in the ERC program.

Committee Chair Jason Smith (R. Mo.) disputed Werfel's assertion. “[A]ccording to the IRS’s website, as of July 19, the agency still has almost half a million forms left to process,” he said. “This speaks both to how the [ERC]has become plagued by fraud and how the IRS is failing to process legitimate claims in a timely manner.”

Smith also criticized the IRS’s “confusing” guidance on the program. “The lack of clarity and speed from the IRS created an environment where dishonest third-party companies took advantage of businesses to either bend the rules or commit outright fraud,” he said. “We have a system where taxpayers get ripped off by scammers, while legitimate claims go unanswered because of a backwards IRS system.”

The IRS has repeatedly warned tax professionals and taxpayers about ERC scams, in which aggressive marketing tactics have duped many into believing that they are eligible for the credit when they are not. An IRS press release listed the various tactics used by these illegitimate businesses and provided advice on how businesses and others can protect themselves from falling prey to these schemes.

Larry Gray, a Missouri CPA who is the government liaison for the National Association of Tax Professionals (NATP), said in his written statement to the subcommittee that "aggressive and misleading ERC advertising in print, on the radio, and on television ... 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,” he stated. “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."

Rep. Suzan DelBene (D-Wash.) asked one witness, Roger Harris, president of Padgett Business Services, about these so-called “ERC mills” and their impact on small businesses that unknowingly apply for the credit through them, Accounting Today reported.

"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," Harris replied. "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."

In her statement, Linda M. Czipo, president and CEO of the New Jersey Center for Nonprofits, cited confusion regarding eligibility and application requirements in her written statement, mentioning the Paycheck Protection Program (PPP) in particular.

“[S]ome initial drafts of the Paycheck Protection Program originally excluded nonprofit employers from eligibility as well,” she stated. “We are grateful to Congress for heeding the pleas of charitable nonprofits across the country and providing access to these relief programs—in the case of [ERC], structuring it as a payroll tax credit, thereby allowing nonprofits to participate. However, the sheer complexity of the program, repeated changes to guidance, and in some cases, lack of understanding of how nonprofits operate, created or exacerbated confusion and difficulty accessing the program.”

Rep. Brian Fitzpatrick (R-Pa.) said that "[t]he volume of casework that my office has received on the [ERC] issue since January alone has been mind-boggling,” according to Accounting Today. "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 [ERC] 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."

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