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Lawmakers discover the bright side of Retention Tax Credit woes

BY: BRIAN FALER | 01/23/2024 05:00 AM EST

A tax break designed to prevent layoffs during the pandemic has turned into a mess, but at the moment it looks like something else entirely: a political gift.

It’s giving Senate Finance Committee Chair Ron Wyden (D-Ore.) and his House counterpart, Ways and Means Chair Jason Smith (R-Mo.), the chance to raise a surprisingly easy $78 billion.

They want to use the projected savings from cracking down on fraudulent Employee Retention Credit claims to not only finance a package of tax breaks for low-income parents and businesses, but to pay for it almost entirely — making it a rare tax bill that would not add substantially to the deficit.

Normally such “payfors” kick up a good amount of controversy.

When lawmakers wanted to defray the cost of a 2021 infrastructure spending package by imposing new tax-reporting requirements on the crypto industry, it nearly derailed the entire bill.

But there’s been minimal squawking over the proposed crackdown, although one tax writer says his colleagues shouldn’t be using it as a payfor.

If anything, the anti-fraud provisions are giving lawmakers in both parties an additional reason to back the plan, aside from its headline expansions of the Child Tax Credit and several business tax breaks.

“Criminals have abused the credit to file fraudulent claims costing taxpayers billions of dollars,” said Rep. Lloyd Smucker (R-Pa.).

That’s a big change from other tax bills, and it’s helping propel the plan in the House, where it was overwhelmingly approved last week by the chamber’s tax committee on a 40-3 vote.

With the White House throwing its support behind the plan, the package looks increasingly likely to make it into law, though there are still obstacles in the Senate.

The crackdown comes as the IRS finds itself swamped in ERC claims, even as the pandemic receded, thanks to aggressive advertising campaigns by a cottage industry of people promoting the break who then take a cut of the proceeds.

Last year, there were more than 2.1 million ERC claims filed with the IRS, according to the nonpartisan National Taxpayer Advocate, three times as many as there were in 2021, during the height of the pandemic. When the IRS announced a moratorium on processing claims in September, it was receiving 45,000 filings per week.

Businesses can claim the break, worth as much as $26,000 per worker, by amending old tax returns. By late September, the credit had already cost $230 billion.

One tax writer says she’s been solicited by people hawking the provision.

“I continue to receive calls myself from these fraudulent mills claiming I am eligible,” said Rep. Beth Van Duyne (R-Texas).

The IRS is waging its own war on bad claims, with audits and incentives for businesses to withdraw their requests for the credit, but Commissioner Danny Werfel has asked Congress for help.

There will be almost 1.3 million unprocessed ERC claims at the agency by the time filing season begins next week, and an IRS watchdog warns those with legitimate claims may have to wait until after tax season to get their payments.

Some complain lawmakers are not being aggressive enough in going after fraud, but they are attempting to steer clear of proposals that could hit legitimate ones as well, and rile the small business community.

Lawmakers could have raised a lot more money,for example, by retroactively canceling claims — all of those from, say, 2023, or perhaps those above a certain dollar amount.

Instead, their plan bans future claims, and gives business owners time to prepare for the end. The legislation wouldn’t cut off claims until the end of this month. Absent that, businesses would have until as late as 2025 to still take the credit.

Lawmakers are also giving the IRS more time to investigate questionable claims by upping the statute of limitations to six years from when the agency issues payment, up from as few as three years. So, if a business gets money now, it could be subject to audit on it until 2030.

And lawmakers are upping penalties on fraudulent claims — but they are targeting the promoters, not the businesses themselves. The bill creates a new legal definition of a “ERTC promoter,” and subjects them to fines that begin at $200,000.

To the surprise of many, budget forecasters say all of that would raise $78.6 billion, easily topping some other recent payfors that caused far more teeth-gnashing among policymakers.

The cryptocurrency reporting requirement, which is so controversial that Treasury has delayed its implementation, was projected to bring in $28 billion. Another reporting requirement imposed by Congress on Airbnb, Etsy and other gig economy platforms, which Treasury has also delayed, was projected to generate $8 billion.

The ERC crackdown, which would cover all but $399 million of the bill’s cost, barely came up in a Ways and Means hearing last week, except for lawmakers praising it. Much of the business community, focused on the capital, research and interest-related tax cuts in the package, is urging lawmakers to back the bill.

More than 250 business groups signed a letter last week in support of the measure, and the Business Roundtable says it is following that up with an ad campaign urging passage. A spokesperson for the influential small-business lobby NFIB did not respond to requests for comment.

Sen. Thom Tillis (R-N.C.) is a rare critic of the plan.

He complains that lawmakers didn’t pay for the ERC when they created it and it has ended up costing far more than expected, so it doesn’t make sense that Congress should now take credit for savings by ratcheting it back.

“I call it pay-for laundering,” he said.

Benjamin Guggenheim contributed to this report.

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