During a recent private meeting with senators, IRS Commissioner Danny Werfel was asked by the chairman of the Senate Finance Committee to provide his evaluation of a concerning report. The report, based on information from a whistleblower, claimed that 95% of current business claims for a tax break related to COVID-19 were fraudulent.

The lawmaker who asked the question, Senator Ron Wyden of Oregon, remembered that the person looked down at their shoes and responded with a simple “Yes.”

Congress is hurrying to decrease the employee retention tax credit, which was introduced during the COVID-19 crisis as a way to encourage companies to retain their employees.

The demand for credit increased significantly when Congress extended the tax break and expanded it to include more companies. Marketers were aggressively promoting the possibility of large refunds for business owners who applied. As a result, the estimated cost to the federal government of $55 billion has now grown to nearly five times that amount as of July. Additionally, the IRS continues to receive new claims each week, leading to a growing expense that lawmakers are eager to limit.

Politicians from both sides of the aisle, who often disagree on many issues, including liberal Senator Elizabeth Warren of Massachusetts and conservative Senator Ron Johnson of Wisconsin, all concur that it is necessary to shut down the program.

Johnson stated that while he did not have the precise figure, there is a high level of fraudulent activity within the program. He believes that the program should be terminated and cannot understand why anyone would endorse it.

Warren commented that the standards were too lax and the supervision was insufficient.

According to the Joint Committee on Taxation, accelerating the conclusion of the program and imposing stricter penalties on companies that encourage false claims could result in a revenue of approximately $79 billion within a decade.

Legislators intend to utilize the funds to balance out the expenses of three corporate tax exemptions and a more generous tax credit for low-income families with children. Households receiving benefits from the revised child tax credit can expect an average reduction of $680 in their taxes in the initial year, according to a calculation by the nonpartisan Tax Policy Center.

The child tax credit is $2,000 per child, with a maximum refundable amount of $1,600. This means that parents who owe little or no federal income taxes can still receive the credit. An agreement made by congressional tax-writers earlier this month will gradually increase the maximum refundable amount to $1,800 in 2023, $1,900 in the following year, and $2,000 for 2025 tax returns. The Center on Budget and Policy Priorities, a liberal think tank and advocacy group, estimated that approximately 16 million children in low-income families will benefit from this expansion of the child tax credit.

The House committee voted decisively in favor of the package last week, with a tally of 40-3, indicating widespread and bipartisan backing.

However, the bill may face obstacles in Congress as certain senators have expressed reservations about certain aspects. Senator Wyden believes that a positive vote in the House may motivate the Senate to act swiftly. Nevertheless, passing significant legislation during an election year is typically challenging.

According to the current legislation, individuals have until April 15, 2025 to receive the employee retention credit. However, the proposed bill would prohibit new claims after January 31 of the current year and impose severe consequences on those promoting the employer retention tax credit if they knowingly provide advice that results in underreporting of tax obligations.

After the pandemic began, Congress implemented a tax benefit for employers which was highly favored and subsequently modified and prolonged three times. This credit, with a maximum value of $26,000 per worker, can be applied to wages paid until the end of 2021.

In order to be eligible, companies typically need to demonstrate that their operations were forced to shut down or reduce activity due to a government mandate related to the COVID-19 crisis. Alternatively, the businesses must prove that they have experienced a substantial decrease in income.

Larry Gray, a CPA from Rolla, MO, expressed initial worries about potential misuse of the program.

According to Gray, there wasn’t much documentation available. The IRS simply began distributing the checks without much explanation. It seems that Congress had requested for the checks to be printed.

He was right, based on the documents he examined. He has even lost some clients who refused to accept that they did not meet the requirements while others were saying they did. According to him, the businesses that are not eligible are not mentioning the government mandate that led to their shutdown or reduced operations. They are also frequently using reasons for reimbursement that do not fit the program’s guidelines. For instance, one company claimed they were having trouble finding workers and had to increase wages in order to qualify.

Gray stated that upon reviewing the narratives on the filings, every American business would be eligible.

The Internal Revenue Service stopped receiving applications for the tax credit in September of last year and will continue to do so until 2024. This decision was made due to concerns about the high number of potentially fraudulent applications. As of that time, the IRS had already received 3.6 million claims.

A significant amount of fraud has occurred, such as the recent arrest of a tax preparer in New Jersey. The individual was charged in July for attempting to deceive the IRS by filing over 1,000 tax returns and fraudulently claiming employment tax credits totaling over $124 million.

In a recent announcement regarding the program, the IRS stated that it currently has numerous audits in progress. As of December 31st, they have also launched 352 criminal investigations related to over $2.9 billion in possibly fraudulent claims. Additionally, the IRS has begun nine civil investigations into marketers who may have deceived employers regarding their eligibility to file claims.

Werfel provided a report to the Senate Finance Committee about the actions taken to combat fraud. These measures include creating a specific program for individuals with pending claims and implementing a voluntary disclosure program for those who received incorrect payments. As a result, the IRS has observed a 40% decrease in weekly claims.

Legislators stress the importance of reducing fraudulent claims to expedite the resolution of legitimate claims filed by businesses, which are still pending. As of early December, the IRS had approximately 1 million claims awaiting resolution.

The task of finding ways to cover the costs of new expenditures or tax reductions is often a challenge for Congress. However, it seems that the employee retention tax credit has little support among lawmakers on Capitol Hill.

Senator Mark Warner, a Democrat from Virginia, described the program as having good intentions but also having significant issues.