A pandemic-era tax credit intended to help struggling companies survive and retain employees has become a fraud magnet and created a cottage industry of firms that market tax advice, the New York Times reports. The program offers businesses thousands of dollars per employee if they could show that Covid-19 was hurting their bottom lines and that they were continuing to pay workers. Although the public health emergency is over, taxpayers can continue to apply for the tax credit until 2025. That has fueled a run for the money and the proliferation of financial service providers, who often charge hefty upfront fees or take cuts of around 25% of any tax refund. The tax credit has become so popular that it is turning out to be far more costly than expected. In 2021, after Congress expanded eligibility for the credit, the Congressional Budget Office projected that it would cost the federal government about $85 billion over a decade — up from an earlier estimate of $55 billion.
The Internal Revenue Service does not yet know how many of the approved refunds were based on fraudulent applications. But it has begun ramping up efforts to root out scams and focusing additional scrutiny on filings from firms that appear suspicious. In early February, federal prosecutors in Utah accused Zachary Bassett and Mason Warr of cheating the government out of millions of dollars. The accounting firm they operated had submitted more than 1,000 allegedly fraudulent tax forms to the IRS on behalf of businesses trying to claim pandemic-era stimulus funds. COS Accounting and Tax shut down later that month, leaving businesses and taxpayers that had paid the firm to help them claim federal money trying to figure out what had happened and why they were suddenly receiving audit notices from the IRS. On Thursday, the IRS issued a warning to businesses to be on the lookout for “scams” related to the tax credit, saying it was fueling a flood of “invalid” applications. “These are Johnny-come-latelies, showing up and they’re pushing this product, pushing this activity in a way that is unethical,” Douglas O’Donnell, the deputy commissioner of services and enforcement at the IRS, said in an interview. “It is drawing businesses into a trap, that they will then be claiming a credit that they are not entitled to.”