House lawmakers scrutinize pandemic-era small business tax break expert calls 'fraught with fraud'


IRS Commissioner Daniel Werfel testifies before a Senate Finance Committee hearing on Feb. 15, 2023.

Kevin Lamarque | Reuters

Scrutiny of a pandemic-era tax credit intensified this week as lawmakers, the IRS and tax professionals sought solutions for the wave of small businesses that wrongly claimed the tax break. The There’s still time for eligible businesses to amend returns and claim credits, which has sparked a cottage industry of firms, known as “ERC mills,” pushing the credit to businesses that may or may not qualify.

“While it was a great opportunity and much-needed lifeline to small businesses, it is fraught with fraud,” said Roger Harris, president of accounting and tax firm Padgett Advisors, speaking at a House Ways and Means Committee hearing Thursday.

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“Any time this amount of money is being handed out through the tax system, the bad actors show up, and they have shown up in large numbers,” he said.

As of July 26, the IRS said, it had roughly 506,000 unprocessed Form 941-X amended payroll tax returns.

As the IRS works through its backlog of unprocessed amended returns, it’s unclear how many small businesses may have wrongly claimed the credit. Harris That’s because a single PEO claim can represent many small businesses.

IRS says legitimate ERC claims are declining

The IRS has issued several warnings about “ERC schemes” and added the issue to the top of its “Dirty Dozen” list of tax scams for 2023. The We

The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining.

Danny Werfel

IRS Commissioner

Currently, small businesses have until April 15, 2024, to amend returns for 2020 and until April 15, 2025, to amend returns for 2021. “That raises future concerns,” and the agency is weighing an earlier end date, Werfel said.

Tax professionals need a ‘real-world solution’

Meanwhile, questions linger for tax professionals fielding questions from small businesses about ERC claims.

“As practitioners, we need guidance,” Larry Gray, a certified public accountant and partner at AGC CPA, said in written testimony for the House hearing. We Gray