Several of our clients have shared with us an alarming New York Times article from May 23, 2023, entitled “This Little-Known Pandemic-Era Tax Credit Has Become a Magnet for Fraud,” and have asked us for our response.
Here is our response.
1. Some Fraud Does Not Equal Pervasive Fraud
First, we completely agree with Times reporter Alan Rappeport that companies should be careful before retaining consultants to obtain their ERC credits. There are, indeed, some disreputable firms in the marketplace, and anyone promising a windfall of free money is, in a word, lying. Customers should avoid “firms that market themselves as tax credit specialists who can help clients — even those who don’t qualify for the money — reap huge refunds from the I.R.S.”
But where the article goes astonishingly wrong is in painting with such a broad brush that the entire ERC program is depicted as nothing more than a fraudulent scheme. That is outrageous, unsubstantiated, and offensive.
Our field includes most of the leading companies in the payroll and finance industries. Are all of them merely shysters? Why were they not interviewed for the Times article?
Why is there not a scintilla of statistical evidence indicating what percentage of firms, or filings, are implicated in fraud? The Times article insinuates that the entire field is shot through with fraud, but offers no evidence of that whatsoever. Only rhetoric – no facts, no data, nothing. There is absolutely no evidence provided in the article that agencies engaged in fraud represent more than a sliver of the ERC advisory field.
After all, there are mountains of fraud in income tax as well. That doesn’t mean that H&R Block is a fraudulent operation. It means that some tax firms are reputable, and others are not. Likewise here.
2. Comply with ERC Rules, and You Don’t Commit ERC Fraud
Alright, so if we grant that most firms are honest, and some are bad apples, how can you tell the difference?
The Times offers absolutely no help.
Take the example in the Times article’s lede, a firm we had never heard of before known as COS Accounting & Tax LLC, also known as 1099 Tax Pros. According to the Justice Department’s press release regarding the matter, this firm is primarily an accounting firm, not focused on the ERC, and it submitted $11 million of false claims on behalf of its clients in 2020 and 2021.
The press release does not state what, exactly, were the false statements in these claims, and neither does the Times article, which vaguely waves its hands and says that filings were done fraudulently. That is extremely unhelpful. Why doesn’t the Times specify what kinds of fraud was perpetrated, so that consumers could educate themselves?
Now, from past cases – one involving a Florida state legislator – we know that examples of fraud that have attracted government attention often involve businesses that were not in operation during the time period of the claim and false financial records including falsified payroll documentation.
Obviously, the very existence of this blog post indicates that our firm has never engaged in such conduct. Our clients provide us with payroll, revenue, PPP, and Covid impact documentation, which our team of lawyers and financial professionals carefully evaluate. Using our proprietary technology, we analyze these documents and determine exactly, to the penny, how much ERC a client legitimately deserves.
You won’t find this precision in the Times report. One IRS official says that unscrupulous consultants are “drawing businesses into a trap, that they will then be claiming a credit that they are not entitled to.”
If I were a business owner, I would find that very concerning. So I would want to know: How can I tell truth from fiction? Is there any way to file for the ERC without risking being prosecuted fraud? Again, the Times article doesn’t say.
But just like with your personal taxes the answer is clear enough: Obey the rules. Be honest. And don’t play games.
There are two ways to qualify for the ERC: either a decline in revenues (on a quarterly basis, YOY compared with 2019) or a partial suspension of business operations, which is when government regulations caused a more than nominal impact on the business. If you have a clear, documented qualification basis; if you truthfully report your payroll and revenue numbers; if you properly account for PPP – then you are complying with the law and are entitled to the ERC.
Just imagine if, say, the charitable deduction from income tax was depicted in this way. Tax preparers are wildly inflating the amounts individuals are deducting for charitable donations, an article warns. How much? Who? How can I avoid the bad guys? No answer. Just scary language like: Beware, the IRS is cracking down on charitable donation fraud.
All of which is true, of course. There are probably thousands of people this year who misrepresent the amount of money they give to charities, or mistakenly include donations which don’t qualify (e.g. to political organizations), or simply make mistakes. That’s why people work with accountants, to ensure compliance. Are there some accountants who commit fraud? Presumably. But there are plenty more who do not.
3. Incorrect Statements in the Times’ ERC Article
It would be bad enough if the Times article were merely sensationalistic clickbait. But in fact, it’s often downright wrong.
One of only concrete examples of fraud in the entire article is that “tax preparation firms are not telling clients that they cannot claim the tax credit on wages if they also received money to cover payroll costs through the Paycheck Protection Program.”
But guess what: this statement is false. Not only is it false, but it is the subject of multiple IRS notes, and a letter from the AICPA.
What is true is that the same wages cannot be utilized to qualify for both the PPP and the ERC. You cannot “double-dip.” But Rappeport incorrectly states that companies cannot claim the ERC “if they also received money to cover payroll costs through the Paycheck Protection Program.” That is false. As long as the same wages are not used for both, the IRS has specifically stated, on numerous times, that entities can claim both credits based on different wages. The Times has not issued a correction of this false statement.
For the record, you can receive both PPP and ERC as long as no wages are used for both credits. As part of our proprietary methodology, we allocate wages to one credit or the other, ensuring 100% compliance with the law.
The most ridiculous claim in the Times article, though, is that the ERC program is somehow responsible for the federal debt crisis. The IRS has paid out $152 billion in ERC tax credits, which seems like a lot until you note that the federal government collected $4.9 trillion in taxes in 2023 alone. So the total cost of the ERC program is less than 3% of one year’s tax receipts. The federal military budget, by contrast, is $2 trillion.
4. The Times Misses the Real Problem with the ERC: The IRS
Finally, the Times article, by focusing on a few bad actors, misses the real problem with the ERC, which is the IRS’s inexplicable decision to make it so difficult to obtain.
Let’s step back for a moment. Suppose you were running a restaurant in 2020. You were shut down for weeks, then capacity-limited by a series of government orders. You complied with the law, both to stop the spread of Covid-19 and, well, because it’s the law. You took a major hit to your finances and operations. But you kept your employees on payroll rather than laying them off, because that’s what good people do.
That is why the ERC exists: to compensate businesses and nonprofits who did the right thing. They obeyed the laws but took care of their own.
Now, the smart thing for the IRS to do would’ve been to create a form, like they did for the PPP, to enable businesses to easily obtain the ERC. But for some reason, the IRS didn’t do that. There’s no single place where you can learn the rules, complete the forms, and obtain the credit.
Instead, you have to master several sets of rules (they changed three times) and then back-amend quarterly payroll tax returns for up to seven quarters, and then sign and send them in by mail, and then wait four to six months for a response.
I’m sorry, but as much as fraudsters are the “bad guys,” the real bad guys are whoever decided to make the ERC so hard to apply for. Congress passed this law – not once but four times, counting its amendments. On a bipartisan basis, they sought to help nonprofits and small businesses who kept things going in 2020 and 2021. And yet the IRS has subverted the will of Congress and made the ERC extraordinarily difficult to obtain.
That is the real problem.
So, hey, IRS, if you’re so concerned, we suggest you put this entire field out of business. Make the ERC as easy to obtain as the PPP, and we along with everyone else in our sector will be out of work. Because then the churches, dentist’s offices, schools, and other organizations with whom we’ve worked can get their ERC without needing to retain us. They’ve done their part, but instead of helping them, the IRS has made it as hard as humanly possible to qualify for this valuable credit. So, IRS, why don’t you do something about it?
Until that happens, we hope that reporters looking for clicks will stop exaggerating the misdeeds of the few to unfairly smear the many. As reputable financial advisors, we are offended by the Times article. You should be too.