Ending COVID-Era Program May Help Congress Expand Child Tax Credit

WASHINGTON — When the U.S. Internal Revenue Service Commissioner Danny Werfel met privately with senators recently, the chairman of the Senate Finance Committee asked for his assessment of a startling report: A whistleblower estimated that 95% of claims now being made by businesses for a COVID-era tax break were fraudulent.

“He looked at his shoes and he basically said, ‘Yeah,’” recalled the lawmaker who posed that question, Senator Ron Wyden, a Democrat from Oregon.

The answer explains why Congress is racing to wind down what is known as the employee retention tax credit. Congress established the program during the coronavirus pandemic as an incentive for businesses to keep workers on the payroll.

Demand for the credit soared as Congress extended the tax break and made it available to more companies. Aggressive marketers dangled the prospect of enormous refunds to business owners if they would just apply. As a result, what was expected to cost the federal government $55 billion has instead ballooned to nearly five times that amount as of July. Meanwhile, new claims are still pouring into the IRS each week, ensuring a growing price tag that lawmakers are anxious to cap.

Lawmakers across the political spectrum who rarely agree on little else — from liberal Senator Elizabeth Warren of Massachusetts to conservative Senator Ron Johnson of Wisconsin — agree it’s 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,” Johnson said. “I don’t see how anybody could support it.”

Warren added: “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 increasing penalties for those companies promoting improper claims would generate about $79 billion over 10 years.

Lawmakers aim to use the savings to offset the cost of three business tax breaks and a more generous child tax credit for many low-income families. Households benefiting from the changes in the child tax credit would see an average tax cut of $680 in the first year, according to an estimate from the nonpartisan Tax Policy Center.

The package was overwhelmingly approved by a House committee last week, 40-3, showing it has broad, bipartisan support.

But passage through Congress is not assured because many key senators have concerns about aspects of the bill. Wyden said a strong vote in the House could spur the Senate into quicker action. Still, passing major legislation in an election year is generally a heavy lift.

Under current law, taxpayers have until April 15, 2025, to claim the employee retention credit. The bill would bar new claims after January 31 of this year. It also would impose stiff penalties on those who are promoting the employer retention tax credit if they know or have reason to know their advice will lead to an underreporting of tax liabilities.

When Congress created the tax break for employers at the pandemic’s onset, it proved so popular that lawmakers extended and amended the program three times. The credit, worth up to $26,000 per employee, can be claimed on wages paid through 2021.

To qualify, generally businesses must show that a local or state government order related to the COVID-19 pandemic resulted in their business having to close or partially suspend operations. Or the businesses must show they experienced a significant decline in revenue.

Larry Gray, a certified public accountant from Rolla, Missouri, said he had concerns early on about how the program could be abused.

“There was no documentation really to speak,” and the IRS just sent out the checks, Gray said. “They just started printing the checks, and I believe Congress was wanting them to print the checks.”

His hunch has proven correct, judging by the filings that he has reviewed. He has even lost clients who didn’t want to hear that they did not qualify when others were telling them they did. Generally, he said, the businesses that don’t qualify are failing to cite the government order that resulted in their closure or partial suspension.

They are also routinely citing reasons for reimbursement that don’t meet the program’s criteria. For example, one company said it was struggling to find employees and had to raise wages as a justification for qualifying.

“If I go through the narratives on the filings that I’m looking at, every business in America qualifies,” Gray said.

The IRS paused accepting claims for the tax credit in September last year until 2024 due to rising concerns that an influx of fraudulent applications. At that point, it had received 3.6 million claims.

Some fraud has been prolific. For instance, a New Jersey tax preparer was arrested in July on charges related to fraudulently seeking over $124 million from the IRS when he filed more than 1,000 tax returns claiming the employment tax credits.

In an update issued Thursday about the program, the IRS said that it has thousands of audits in the pipeline and that as of Dec. 31, it has initiated 352 criminal investigations involving more than $2.9 billion in potentially fraudulent claims. Separately, it has opened nine civil investigations of marketers that potentially misled employers on eligibility to file claims.