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Notice: Congress is scheduled to recess for the entire month of August starting next week. The Recap will be on hiatus until lawmakers return in September.
The Employee Retention Tax Credit has garnered the wrong kind of attention from lawmakers and the IRS. Could it come to an early end?
What Went Down:
- There are ERTC filers who don’t qualify for the relief, but got it anyway. These shenanigans have gotten to the level that the IRS wouldn’t mind ending the program early.
- A Republican tax-writer thinks a modified Child Tax Credit will be included in the tax bill containing The Big Three.
- The chief House tax-writer responds to IRS ending unannounced taxpayer visits.
- Lawmakers want to know why IRS destroyed millions of tax documents.
Let’s Get To It:
Quick interruption: The tax-writing committees have engaged in investigations and hearings that could be viewed as political and not legislative. When the Recap returns in September, it will not cover these events until they become legislative topics that affect a large swath of taxpayers.
Back to regular programing.
ERTC Scrutiny:
The House Ways and Means Oversight Subcommittee held a hearing on July 27th about the fraud that has occurred by some to get relief from the Employee Retention Tax Credit. And while lawmakers agreed that ERTC fraud is a problem, the parties disagreed over what caused it.
House Ways and Means Chairman Jason Smith (R-Mo.) joined the subcommittee hearing and essentially blamed the IRS for not providing timely guidance to taxpayers on how to comply with the Credit.
“The lack of clarity and speed from the IRS created an environment where dishonest, third party companies took advantage of businesses to either bend the rules or commit out-right fraud,” Smith said. “The ERTC is on the IRS ‘Dirty Dozen’ list of scams… To be put on the list speaks to the severity of this issue.”
Subcommittee Ranking Member Bill Pascrell (D-NJ) blamed the lack of IRS funding for why the agency was delayed in providing guidance and oversight on the tax credit.
“I want to remind people: Every Republican in Congress voted against making tax time easier. Like the old saying goes, you get what you pay for,” Pascrell said.
Republicans have cut IRS funding over the past decade. Democrats recently enacted legislation that provided the IRS with an extra $80 billion over the next ten years. However, since enactment of the bill the money to the tax agency has been reduced.
It was repeatedly stated during today's hearing that businesses have waited months – even years – get their ERTC payments. It was also repeatedly stated that IRS backlog issues have lessened, which should improve the odds for the tax agency getting ERTC checks out the door.
Clearing the backlog will also allow the IRS to scrutinize ERTC applications. And there could be tax consequences for businesses that received the credit but didn’t qualify for it, according to one of the witnesses who testified before the Subcommittee.
“There could be millions of returns coming in for which penalties and interest will most likely be charged because of the additional tax,” said Roger Harris, President at Padgett Advisors.
It was stated during the hearing that amended ERTC returns will add to the already 600,000 ERTC returns that are a part of the backlog,
A recurring message from the witnesses was that no matter where the blame falls, businesses need guidance – consistent guidance – on qualifying for the ERTC.
“We need clear, permanent guidance so that the people can rely on what they’re doing,” Harris said.
Witnesses also suggested that Congress enact a safe harbor for businesses to file an amended return without incurring interest and penalities.
The hearing came on the heels of the IRS announcing yesterday that it will “increase scrutiny” on ERTC filers:
With the Internal Revenue Service making substantial progress in the ongoing effort related to the Employee Retention Credit (ERC) claims, Commissioner Danny Werfel said the agency has entered a new phase of increasing scrutiny on dubious submissions while renewing consumer warnings against aggressive marketing.
Speaking Tuesday at a special roundtable session of tax professionals in Atlanta, Werfel noted the IRS has shifted efforts after successfully clearing the backlog of valid Employee Retention Credits (ERC) claims. Now, the agency is intensifying compliance work and putting in place additional procedures to deal with fraud in the program.
The intensity will be on promoters as well as businesses that claim the credit.
IRS Commissioner Daniel Werfel noted that legit tax preparers could be negatively affected by rogue preparers who said they qualified for the credit, but didn't.
‘Hard-working tax professionals who play by the rules see their clients go elsewhere, lured by false promises and wild exaggerations,’ Werfel added. ‘The resulting number of claims prevents the IRS from doing other priority work. But the biggest risk is being taken by the promoters pushing these schemes and businesses filing these claims. This is an area where we urge caution; those improperly claiming the credit could face follow-up action from the IRS.’
Legislative Outlook: Congress could end the ERTC program early, which the IRS would reportedly support. However, congressional chambers are politically divided, which makes it virtually impossible to pass controversial legislation. Ending the ERTC early would be contentious because it would block legitimate ERTC filers from receiving relief.
CTC in Tax Bill?
A lawmaker (speaking off the record) who sits on the tax-writing House Ways and Means Committee said this week that modifications to the Child Tax Credit (CTC) would likely be added to the tax bill that includes The Big Three (R&D expensing, 163(j) expansion, 100% Bonus Depreciation).
However, it is not clear how the CTC will be modified. In fact, lawmakers aren’t even discussing it because they have another problem, the lawmaker said.
A handful of House Republicans have vowed to oppose the tax bill if it doesn’t include SALT cap relief. Currently, the legislation does not include this relief.
House Republicans representing districts in high tax states want to repeal or increase the SALT cap. There are enough of them to stop the tax bill from passing the House (assuming they stick to their guns and oppose the bill if a cap adjustment is not included) since no Democrats are expected to support the legislation.
Currently, there is no agreement on how to handle this situation. Pro-SALT-cap relief Republicans have been offered incremental relief (like increasing the cap to $30,000), but they didn’t bite, according to the lawmaker.
The lawmaker also said that the earliest the House could pass the tax bill would be in October. His timetable suggests that final action on the bill would be toward year end (if there is action on the bill).
Before focusing on the tax bill, the House and Senate must pass identical spending bills, which is a quagmire itself and could delay action on the tax bill beyond October, the lawmaker said.
Back to the Child Tax Credit: Assuming House Republicans get the pro-SALT reform members in their caucus to support the tax bill, there is still the CTC issue, which is more of an issue in the Senate than it is in the House.
One of the biggest hurdles on the CTC front is imposing work requirements to qualify for the credit. Republicans want them. Democrats don’t.
Legislative Outlook: Passing the tax bill will require support from members of both political parties. To successfully add a CTC provision to the bill it can't enrage the GOP while also pleasing Democrats. This will be a tough nut to crack. There is also the SALT-cap disruption. Make that two tough nuts to crack.
Rejoice?
The IRS announced on July 24th that it will end “most” unannounced visits that agents make to taxpayers’ homes and offices.
IRS press release (emphasis is on me):
As part of a larger transformation effort, the Internal Revenue Service today announced a major policy change that will end most unannounced visits to taxpayers by agency revenue officers to reduce public confusion and enhance overall safety measures for taxpayers and employees.
The change reverses a decades-long practice by IRS revenue officers, the unarmed agency employees whose duties include visiting households and businesses to help taxpayers resolve their account balances by collecting unpaid taxes and unfiled tax returns. Effective immediately, unannounced visits will end except in a few unique circumstances and will be replaced with mailed letters to schedule meetings.
Unannounced visits will still occur regarding “summonses and subpoenas; and also sensitive enforcement activities involving seizure of assets, especially those at risk of being placed beyond the reach of the government,” according to the IRS.
Last week’s Recap reported that Republicans on the Senate Finance Committee asked IRS Commissioner Daniel Werfel via letter to explain how the unannounced visits work. The letter also stated that some of these visits were “depicted as intimidating to the taxpayers in question.”
The fact that the IRS is drawing this program to a close did not excite the leading, tax-writing Republican.
House Ways and Means Chairman Jason Smith (R-Mo.):
There’s little reason to cheer the IRS’s recent announcement that it is supposedly ‘ending’ unannounced visits by revenue officers – the agency has yet to provide a full explanation for why it used such disturbing tactics to show up on people’s doorstep and invade their privacy. Americans remain concerned about the agency’s political targeting and favoritism, regardless of whether they announce their visits or not…
Smith didn’t mention it, but his “agency’s political targeting” comment conjures up memories of Lois Lerner. In 2013, she casually informed a D.C. audience that the tax agency had been targeting certain, conservative non-profit organizations.
The Internal Revenue Service on Friday apologized for targeting groups with ‘tea party’ or ‘patriot’ in their names, confirming long-standing accusations by some conservatives that their applications for tax-exempt status were being improperly delayed and scrutinized.
Lois G. Lerner, the IRS official who oversees tax-exempt groups, said the ‘absolutely inappropriate’ actions by ‘front-line people’ were not driven by partisan motives.
Investigations occurred on this situation, and – wait for it – the findings were considered partisan.
The Republican majority on the House Oversight Committee issued a report, which concluded that although some liberal groups were selected for additional review, the scrutiny that these groups received did not amount to targeting when compared to the greater scrutiny received by conservative groups. The report was criticized by the committee's Democratic minority, which said that the report ignored evidence that the IRS used keywords to identify both liberal and conservative groups.
Legislative Outlook: Congressional action might not be needed. The IRS has vowed to stop (or at least reduce) knocking on people’s doors unannounced.
Search for Destroyed:
Republican leaders on the House Ways and Means Committee wrote IRS Commissioner Danial Werfel on July 25th asking for a copy of the memo that told tax agency employees to destroy 30 million unprocessed tax returns.
Destroying these documents made headlines because it happened in March of 2021 when the tax agency was struggling to work through a historically large filing backlog. The lawmakers basically want a full accounting for how the decision was made to destroy tax information that was not old. Also, they have previously asked for this information.
From the letter:
The decision to destroy information returns diligently prepared by millions of American taxpayers demands congressional oversight. The destruction of these returns raises the question of whether information reporting should be scaled back to reduce the burden placed on taxpayers in reporting information the IRS does not even use.
Legislative Outlook: It very likely that the House will hold hearings on this issue and pass legislation addressing it. But that might be as far as it goes, legislatively speaking. The Senate will likely not act on this issue, unless the House uncovers something that is truly appalling.
Pardon if this recap missed a monumental moment, but we can recap it next time!
Adios amigos!