Congress is facing a major dilemma as they race to shut down the employee retention tax credit program. The recent revelation that 95% of claims made by businesses for this COVID-era tax break are fraudulent has sparked a sense of urgency among lawmakers. The program, initially established as an incentive for businesses to retain their employees during the pandemic, has instead become a breeding ground for fraud and abuse.
During a private meeting with senators, U.S. Internal Revenue Service Commissioner Danny Werfel was asked to assess the situation. Senator Ron Wyden, chairman of the Senate Finance Committee, recalls Werfel’s response, “He looked at his shoes and he basically said, ‘Yeah.'” This admission from Werfel sheds light on the reason behind Congress’s haste to end the program.
The demand for the employee retention tax credit skyrocketed as Congress extended the tax break and made it available to more companies. Aggressive marketing tactics promising huge refunds to business owners have only added fuel to the fire. As a result, what was initially estimated to cost the federal government $55 billion has now ballooned to nearly five times that amount as of July. And the claims continue to pour in, ensuring a growing price tag that lawmakers are eager to put a cap on.
This alarming situation has united lawmakers from both ends of the political spectrum, who rarely agree on anything else. From liberal Senator Elizabeth Warren to conservative Senator Ron Johnson, there is a unanimous consensus that it is time to close the program. “I don’t have the exact number, but it’s like almost universal fraud in the program. It should be ended,” says Johnson. Warren adds, “The standards were too loose, and the oversight was too thin.”
The Joint Committee on Taxation estimates that winding down the program more quickly and imposing stricter penalties on those promoting improper claims could generate about $79 billion over the next 10 years. This money could then be used to offset the cost of three business tax breaks and a more generous child tax credit for low-income families. According to the nonpartisan Tax Policy Center, households benefiting from these changes in the child tax credit could see an average tax cut of $680 in the first year.
The proposed package has received overwhelming support from the House, with a vote of 40-3 in favor. This shows that the bill has broad, bipartisan support. However, its passage through Congress is not guaranteed as many key senators have expressed concerns about certain aspects of the bill. Senator Wyden believes that a strong vote in the House could push the Senate to take quicker action. Passing major legislation in an election year is always a challenge, but the urgency of this situation cannot be ignored.
Under current law, taxpayers have until April 15, 2025, to claim the employee retention credit. However, the proposed bill would bar any new claims after January 31 of this year. It would also impose severe penalties on those who promote the employer retention tax credit, knowing or having reason to know that their advice will result in underreporting of tax liabilities.
The employee retention credit was created by Congress at the onset of the pandemic and proved to be immensely popular, leading to three extensions and amendments. The credit, which can be worth up to $26,000 per employee, can be claimed on wages paid through 2021. To qualify, businesses must show that a local or state government order related to the COVID-19 pandemic resulted in their closure or partial suspension of operations. Alternatively, they must demonstrate a significant decline in revenue.
However, certified public accountant Larry Gray from Rolla, Missouri, had concerns early on about the potential for abuse. “There was no documentation really to speak of, and the IRS just sent out the checks,” says Gray. “They just started printing the checks, and I believe Congress was wanting them to print the checks.” Unfortunately, Gray’s suspicions were proven correct as he reviewed the filings and even lost clients who did not qualify for the credit but were being told otherwise by other sources. He notes that many businesses fail to cite the government order that resulted in their closure or partial suspension and often cite reasons for reimbursement that do not meet the program’s criteria. Gray humorously adds, “If I go through the narratives on the filings that I’m looking at, every business in America qualifies.”
The IRS temporarily stopped accepting claims for the tax credit in September last year until 2024 due to concerns about the influx of fraudulent applications. By that point, they had already received
