Lawmakers Press IRS on Tax Fairness, Employee Retention Credit Fraud

With a government shutdown averted for the time being, members of Congress in both chambers this week have refocused attention to policy and administrative issues they would see addressed by the Treasury Department and IRS.

Tax Fairness.

The week began with correspondence from Sens. Elizabeth Warren (D-Mass.), Sheldon Whitehouse, (D-R.I.), Chris Van Hollen (D-Md.), and Bernie Sanders (I-Vt.), who sent a letter to Treasury Secretary Janet Yellen and IRS Commissioner Danny Werfel October 2.

The quartet urged Treasury to “use its rulemaking authority to close tax loopholes that create inconsistency and unfairness” in the Code, building upon provisions in last year’s Inflation Reduction Act (PL 117-169). Through regulations, Treasury can combat tax avoidance behaviors by the top earners and large, multinational corporations, according to the senators.

This includes guidance addressing “dynastic wealth” and transfers of foreign assets; tax liability for subsidiaries’ passive earnings; and payroll taxes owed by fund managers.

“For decades, thanks to intense corporate lobbying for tax cuts and loopholes, the largest and most profitable corporations have paid less in taxes than small business and middle-class families, or even paid nothing at all,” read the letter. “The Treasury Department has clear authority to revisit prior rulemaking to ensure the law is correctly implemented and the wealthy do not receive further unmerited tax giveaways.”

Yellen and Werfel were asked to provide a staff-level briefing on the Department’s plans “to make the tax system fairer” by November 2.

Employee Retention Credit.

Meanwhile in the House, Ways and Means Committee Chair Jason Smith (R-Mo.) and Oversight Subcommittee Chair David Schweikert (R-Ariz.) wrote to Werfel October 3 seeking clarity in light of the IRS’ decision September 14 to halt processing of new employee retention credit (ERC) claims through, at minimum, the end of the year.

The ERC was intended to help businesses experiencing disruptions during the COVID-19 pandemic keep employees unable to perform their job duties on payroll. But so-called ERC mills, bad-faith tax preparers looking to capitalize on the popularity of the credit, contributed to a deluge of post-pandemic claims often riddled with overstatements or errors.

Although the end of the claim period was set for April 15, Werfel announced a stop to sort through the backlog of unprocessed ERC claims to stop the bleeding and prevent fraudsters from continuing to profit from up-front fees with the promise of getting potentially ineligible clients the credit.

“While we appreciate efforts to protect taxpayers from scams, the announced moratorium will exacerbate wait times, worsen the existing backlog of claims, and prevent taxpayers with legitimate claims from receiving payments,” wrote Smith and Schweikert, who remain skeptical towards what actions will be taken during the pause to timely process legitimate claims while installing fresh guardrails against future fraud.

They petitioned Werfel for answers on a list of 10 items, including when the agency expects the backlog to be cleared, what data was used to come to reach its decision, and when Congress can expect to engage in a dialog about legislative fixes to the ERC program. Responses were requested by October 17.

“While we commend the IRS for its fraud prevention efforts, predatory practices cannot be the only reason for the years-long backlog of delivering refunds to eligible businesses, many of which have suffered financial harm while in processing limbo,” the House Republican leaders said.