The Oversight Subcommittee of the House Ways & Means Committee convened a hearing on July 27, 2023, to discuss “The Employee Retention Tax Credit Experience: Confusion, Delays, and Fraud.”[1] Although the agenda covered three topics, the focus and highlights of the hearing centered around the issue of fraud. Notably, Representative Beth Van Duyne (R-TX) played a key role during the session by sharing a voice mail she received that very morning from an individual claiming to be “Beth” and working for an Employee Retention Credit (ERC) mill. In the voice mail, the representative was informed that she was eligible to receive a payment of $26,000 for every W-2 employee she employs.

According to a Tax Notes Today Federal article, [2] it was pointed out that Rep. Van Duyne’s last position in which she was running a business (as President of a marketing firm) was ten years ago. This observation suggests that the cold call list used by the ERC mill is not accurately targeted, as it attempts to reach individuals who may not be relevant to their scheme.

Additional evidence indicating the lack of targeted calls from the ERC mills was presented by Pat Cleary, President and CEO of the National Association of Professional Employer Organizations (NAPEO). During his earlier testimony at the hearing, Cleary revealed that he had received an ERC solicitation call on the same morning while en route to the hearing. This incident further highlights the indiscriminate and unsolicited nature of the calls made by these mills, raising concerns about their legitimacy and intentions.

Additional information gleaned from the hearing, broadcast live via YouTube and archived online,[3] is provided below.

Appearing at the hearing and taking questions were:

Larry Gray, CPA, Partner, AGC CPA
Roger Harris, President, Padgett Advisors
Pat Cleary, President and CEO, National Association of Professional Employer Organizations (NAPEO)
Linda M. Czipo, President & CEO, New Jersey Center for Nonprofits

Mr. Gray brought attention to a significant issue faced by honest tax professionals who find themselves losing clients due to their refusal to assist in filing tax returns based on claims that they believe are not justified under the law. This dilemma places these professionals in a difficult position, as they prioritize adhering to legal and ethical standards over potentially losing business from clients seeking questionable tax benefits.

Furthermore, Mr. Gray highlighted recent guidance from the Office of Professional Responsibility, which suggested that tax professionals who prepare amended income tax returns to remove deductions used for an Employee Retention Credit (ERC) claim might face scrutiny for perpetuating the error.[4]

The combination of losing clients for taking principled stances and the risk of professional repercussions underscores the complexities and challenges that tax professionals with a commitment to ethics and legal compliance may encounter in today’s landscape.[5]

In addition to the issues previously pointed out by Mr. Gray, Mr. Harris further elaborated on the challenges faced by taxpayers who engage with ERC mills. In his written and oral testimony before the committee, he highlighted the problem of significant fees charged by these ERC mills. When taxpayers discover that they do not actually qualify for the Employee Retention Credit, they are left with a burdensome predicament: having to pay back funds received from the credit, along with the additional fees charged by the ERC mills.

As was noted in Mr. Harris’s written statement:

This situation raises an additional tax issue related to how you treat the large fees that many small businesses paid to third-party mills that calculated and applied for the ERTC on their behalf. The fees charged by many of these third-party mills have been reported to be a significant percentage of the amount of the ERTC credits, amounting to tens of thousands of dollars for many small business taxpayers. There have and will continue to be situations where a tax professional, relying on the OPR guidance, will decide not to file an amended 1040 out of fear that it would perpetuate an improper credit, and will advise the client to return the original ERTC. The question then arises, that if the client returns the ERTC received, can the fee paid to the third-party mills be claimed as a business deduction? One of the problems tax practitioners will confront in correcting an erroneous ERTC claim is that the taxpayer is asked to return 100% of the ERTC claimed when they only received a portion of the money because of the fees paid to the third-party mills.[6]

Subcommittee Chair Representative David Schweikert (D-AZ) indicated that he was contemplating the creation of an amnesty program to address the issue of fraudulent Employee Retention Credit (ERC) claims. However, he expressed reservations about the prospect of allowing promoters of such schemes to retain their unlawfully obtained profits. The focus of the potential amnesty program would likely be on providing relief to taxpayers who unknowingly engaged with ERC mills and were misled into making erroneous claims.

During the hearing, panel members discussed potential solutions to tackle the problem. One suggestion was to require employers seeking relief to cooperate with the IRS by providing information about what the ERC mill had promised them. This information would be valuable in identifying and investigating organizations that promote abusive tax positions. By encouraging cooperation from affected parties, the IRS could gain insights into the deceptive practices of ERC mills and work towards curbing their fraudulent activities.

Mr. Gray proposed the idea of the IRS employing a soft letter program, similar to a previous program used to prompt individuals suspected of not properly reporting cryptocurrency transactions to amend their tax returns. This approach could potentially be applied to address issues related to the Employee Retention Credit (ERC) as well.

But he noted that, as Mr. Harris pointed out, such a letter will only accomplish the goal of increasing voluntary compliance if the affected taxpayers would not have to return funds in excess of the net amount they had previously received.

However no concrete steps towards creating such a program were mentioned in the hearing, as well as no information was provided regarding whether the committee believes the IRS has sufficient tools at its disposal to put together such a relief program or whether additional legislative action would be necessary to create such a program.

Mr. Cleary addressed the challenges faced by Professional Employer Organizations (PEOs) concerning the Employee Retention Credit (ERC) program during the hearing. He highlighted an issue with how the IRS presents statistics regarding the number of claims in process. Currently, the IRS treats the claims filed by each PEO as a single claim, regardless of the fact that the PEO will be submitting claims on behalf of numerous customer businesses, sometimes measuring into the tens of thousands.

Moreover, Mr. Cleary emphasized that the processing of ERC claims filed by PEOs has been unusually slow. While the IRS has claimed to have made progress in reducing the backlog of ERC claims, stating that over 99% of the claims not yet processed are current, Mr. Cleary contested this assertion. According to his testimony, the organizations he represents continue to experience delays in the processing of their claims, with some outstanding claims pending for many months or even years.

Ms. Czipo emphasized the significance of the Employee Retention Credit (ERC) program in extending crucial assistance to not-for-profit organizations. She commended the utilization of the payroll tax system as an effective means of providing relief, acknowledging the positive impact it had on various organizations in need.

Of note, Ms. Czipo’s organization took a unique approach to claim the ERC. They applied for the credit electronically, likely by including it on their Form 941 when filing their payroll tax returns. As a result of this efficient method, her organization received the credit funds due to them within a few weeks.

For the other panelists, the primary method used by the employers they worked with to request the Employee Retention Credit (ERC) was through the use of Form 941X, the Adjusted Employer’s Quarterly Federal Tax Return. However, during the hearing, the inefficiencies associated with this paper-based process were discussed by each of the participants. They highlighted that these inefficiencies were a significant factor contributing to the delays in issuing refunds related to the ERC.

The challenges and delays associated with the Form 941X process became apparent, and it was evident that the manual handling of paper forms hindered the timely processing of ERC claims. As a result, taxpayers seeking the credit did not receive their refunds as rapidly as they may have desired.

The fact that Congress has held hearings on the issues related to the Employee Retention Credit (ERC) demonstrates its acknowledgment of the concerns surrounding the program. However, the legislative process can be time-consuming the current priorities of Congress, such as keeping the government funded and addressing critical matters, may delay any potential legislative action on the ERC.

With Congress on its August recess, and the need to pass a funding solution accepted by both chambers before the end of September, it’s likely that addressing ERC-related issues may be further postponed. Budgetary and funding concerns take precedence, and any legislative action to amend or address the ERC program may have to wait until more pressing matters are resolved.

[1] “The Employee Retention Tax Credit Experience: Confusion, Delays, and Fraud,” Oversight Subcommittee of the House Ways & Means Committee, July 27, 2023, https://waysandmeans.house.gov/event/hearing-on-the-employee-retention-tax-credit-experience-confusion-delays-and-fraud-2/ (retrieved July 29, 2023)

[2] Doug Sword, “W&M Panel Considers Amnesty for Fraudulent ERC Payments,” Tax Notes Today Federal, July 28, 2023, https://www.taxnotes.com/tax-notes-today-federal/fraud-civil-and-criminal/wm-panel-considers-amnesty-fraudulent-erc-payments/2023/07/28/7h0x2 (retrieved July 29, 2023, subscription required)

[3] “Oversight Sub Hearing - Employee Retention Tax Credit Experience: Confusion, Delays, and Fraud,” Ways and Means Committee Republicans YouTube Channel, July 27, 2023, https://www.youtube.com/watch?v=yotrB5DtdGA (hearing begins between 25 and 26 minutes into the video. The first 25 minutes only contain an onscreen title slide and no audio)

[4] IRS Office of Professional Responsibility, “Professional Responsibility and the Employee Retention Credit,” Alerts from Office of Professional Responsibility (OPR), March 7, 2023, https://www.irs.gov/pub/irs-utl/2023-02-professional-responsibility-and-the-employee-retention-credit-R2-508-compliant.pdf (retrieved July 29, 2023)

[5] IRS Office of Professional Responsibility, “Professional Responsibility and the Employee Retention Credit,” Alerts from Office of Professional Responsibility (OPR), March 7, 2023, https://www.irs.gov/pub/irs-utl/2023-02-professional-responsibility-and-the-employee-retention-credit-R2-508-compliant.pdf (retrieved July 29, 2023)

[6] Statement of Roger Harris, President of Padgett Business Services, Hearing on the Employee Retention Tax Credit Experience: Confusion, Delays, and Fraud, July 27, 2023, pp. 5-6, https://waysandmeans.house.gov/wp-content/uploads/2023/07/Harris-Testimony.pdf (retrieved July 29, 2023)