IRS Commissioner Daniel Werfel testifies before a Senate Finance Committee hearing on February 15, 2023.
Kevin Lamarque | Reuters
Scrutiny of a pandemic-era tax credit intensified this week as lawmakers, the IRS and tax experts sought solutions to the wave of small businesses falsely claiming the tax break.
The Employee Retention Credit, or ERC, was enacted in 2020 to support small businesses affected by closures during the Covid-19 pandemic and is worth thousands of dollars per employee. Eligible businesses still have time to amend their tax returns and claim credits, which has led to a cottage industry of firms known as “ERC mills” that pass the credit along to companies that may or may not be eligible.
“While it was a great opportunity and a much-needed lifeline for small businesses, it is rife with fraud,” Roger Harris, president of accounting and tax firm Padgett Advisors, said in a speech to a House budget committee Hear Thursday.
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“Any time this much money is spent through the tax system, the bad guys show up, and in large numbers,” he said.
As of July 26th said the IRSThere were approximately 506,000 unprocessed employment tax returns supplemented with Form 941-X.
As the IRS works through its backlog of unprocessed amended tax returns, it is unclear how many small businesses may have incorrectly claimed the credit. But a future audit “could ruin it,” Harris said.
The IRS has received more than 2.5 million ERC applications since the program began, but processing has slowed due to the “complexity of the amended tax returns,” the agency said.
“The joy of getting the money could very quickly be replaced by the terrible reality that, because you were not eligible, you could be put out of business because of the amount of money you now owe back to the federal government,” said Harris.
According to Pat Cleary, president and CEO of the National Association of Professional Employer Organizations, who also testified before the House of Representatives, the actual backlog of ERC applications could be significantly higher because professional employer organizations (PEOs) provide payroll and other HR services Hear. This is because a single PEO claim can represent many small businesses.
The IRS has issued several Warnings about “ERC programs” and added the topic above to “The dirty dozen“ List of tax fraud cases for 2023. This week the agency announced that it had “increased audit and criminal investigation work” in this area.
“As we move further away from the pandemic, we believe the percentage of eligible claims coming in will decrease,” IRS Commissioner Danny Werfel said at the press conference IRS Nationwide Tax Forum this week in Atlanta. “Instead, we are seeing more and more questionable claims resulting from the onslaught of misleading marketing efforts from event organizers pressuring companies to apply.”
Currently, small businesses have until April 15, 2024 to amend their 2020 returns and until April 15, 2025 to amend their 2021 returns. “This is a concern going forward,” and the agency is considering an earlier end date, Werfel said.
In the meantime, questions remain for tax professionals answering small business questions about ERC claims.
“As practitioners, we need guidance,” said Larry Gray, certified public accountant and partner at AGC CPA written testimony for the hearing in the House of Representatives. “We need guidance to be able to clearly show our customers why they qualify or not.”
He said ERC specialists help companies amend their payroll tax returns, but they don’t amend their income tax returns to reflect the change, resulting in clients being sent back to him.
Additionally, “claiming the credit and correcting the tax return are likely not done by the same people” because many tax professionals do not deal with payroll tax returns, Gray said.
Harris stressed the need for a “real solution” for small businesses that wrongly claimed the loan because “there is no way in the world we can find a way out of this problem.”