[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
HEARING ON THE EMPLOYEE RETENTION TAX
CREDIT EXPERIENCE: CONFUSION, DELAYS,
AND FRAUD
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HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
OF THE
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
JULY 27, 2023
__________
Serial No. 118-0S02
__________
Printed for the use of the Committee on Ways and Means
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________
U.S. GOVERNMENT PUBLISHING OFFICE
54-354 WASHINGTON : 2024
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COMMITTEE ON WAYS AND MEANS
JASON SMITH, Missouri, Chairman
VERN BUCHANAN, Florida RICHARD E. NEAL, Massachusetts
ADRIAN SMITH, Nebraska LLOYD DOGGETT, Texas
MIKE KELLY, Pennsylvania MIKE THOMPSON, California
DAVID SCHWEIKERT, Arizona JOHN B. LARSON, Connecticut
DARIN LaHOOD, Illinois EARL BLUMENAUER, Oregon
BRAD WENSTRUP, Ohio BILL PASCRELL, Jr., New Jersey
JODEY ARRINGTON, Texas DANNY DAVIS, Illinois
DREW FERGUSON, Georgia LINDA SANCHEZ, California
RON ESTES, Kansas BRIAN HIGGINS, New York
LLOYD SMUCKER, Pennsylvania TERRI SEWELL, Alabama
KEVIN HERN, Oklahoma SUZAN DelBENE, Washington
CAROL MILLER, West Virginia JUDY CHU, California
GREG MURPHY, North Carolina GWEN MOORE, Wisconsin
DAVID KUSTOFF, Tennessee DAN KILDEE, Michigan
BRIAN FITZPATRICK, Pennsylvania DON BEYER, Virginia
GREG STEUBE, Florida DWIGHT EVANS, Pennsylvania
CLAUDIA TENNEY, New York BRAD SCHNEIDER, Illinois
MICHELLE FISCHBACH, Minnesota JIMMY PANETTA, California
BLAKE MOORE, Utah
MICHELLE STEEL, California
BETH VAN DUYNE, Texas
RANDY FEENSTRA, Iowa
NICOLE MALLIOTAKIS, New York
MIKE CAREY, Ohio
Mark Roman, Staff Director
Brandon Casey, Minority Chief Counsel
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SUBCOMMITTEE ON OVERSIGHT
DAVID SCHWEIKERT, Arizona, Chairman
BRIAN FITZPATRICK, Pennsylvania BILL PASCRELL, New Jersey
GREG STEUBE, Florida JUDY CHU, California
CLAUDIA TENNEY, New York BRAD SCHNEIDER, Illinois
MICHELLE FISCHBACH, Minnesota SUZAN DelBENE, Washington
BETH VAN DUYNE, Texas GWEN MOORE, Wisconsin
RANDY FEENSTRA, Iowa
NICOLE MALLIOTAKIS, New York
C O N T E N T S
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OPENING STATEMENTS
Page
Hon. David Schweikert, Arizona, Chairman......................... 1
Hon. Bill Pascrell, New Jersey, Ranking Member................... 2
Advisory of July 27, 2023, announcing the hearing................ V
WITNESSES
Larry Gray, CPA, AGC CPA......................................... 5
Roger Harris, President, Padgett Advisors........................ 14
Pat Cleary, President and CEO, National Association of
Professional Employer Organizations (NAPEO).................... 22
Linda M. Czipo, President & CEO, New Jersey Center for Nonprofits 31
PUBLIC SUBMISSIONS FOR THE RECORD
Public Submissions............................................... 65
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THE EMPLOYEE RETENTION TAX CREDIT
EXPERIENCE: CONFUSION, DELAYS,
AND FRAUD
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THURSDAY, JULY 27, 2023
U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.
The subcommittee met, pursuant to call, at 2:15 p.m., in
Room 1100, Longworth House Office Building, Hon. David
Schweikert [chairman of the subcommittee] presiding.
Chairman SCHWEIKERT. The Ways and Means Oversight Committee
is ready to begin.
All right. Good afternoon, and welcome to today's Oversight
Subcommittee hearing.
This is a hearing to allow members of the committee to hear
from those directly impacted by the challenges associated with
the Employer Retention Tax Credit, ERTC.
The hearing will also allow us to hear from those who are
helping employers navigate the ERTC and the agencies that
process and administer the credit, the Internal Revenue
Service, our beloved IRS.
The ERTC is a refundable tax credit originally enacted as
part of the Coronavirus Aid Relief and Economic Security Act,
the CARES Act.
In March 2020, for businesses and tax-exempt organizations,
the ERTC was designed to help businesses retain employees
during the COVID-19 pandemic.
The ERTC, however, can be complex credit to calculate
correctly, as there are many rules and regulations that make it
difficult for small businesses to figure it out on their own.
What is worse is we have already and repeatedly heard from
stakeholders about the hardship caused by--let me change the
page--processing backlogs, how the IRS has not issued
significant guidelines, and how the IRS does not provide
updates to taxpayers about the status of their ERTC claims.
These challenges create a lot of uncertainty for small
businesses.
One of the challenges is the backlog of ERTC claims that
the IRS still needs to process. Form 941-X, the form by which
employers must file their ERTC claims is a paper form. The
employers had to file many ERTC claims retroactively as a
result of processing these claims by the IRS has been shown to
create a massive backlog of unprocessed claims.
Some employers have been waiting months, if not years, for
their credits, still have not actually been processed. This
delay has created immense hardship for employers, particularly
small businesses who desperately need the help in retaining
their employees during the height of the COVID-19 pandemic.
To add to the frustration, employers are unable to check
the status of their ERTC claims. Not only have such delays--not
only have such delays--sorry, I didn't like this line--not only
have such delays have the purpose of ERTC, but it has added
prolonged and confusing continued financial stresses to the
employers who do not know when their claims are going to be
processed and when.
Moreover, insufficient guidelines from the IRS have left
employers and taxpayers unsure how to do the right thing by
correcting ERTC claims that were unintentionally filed
inaccurately, either way with small simple mistakes or because
they were misled as to whether their businesses legitimately
qualified for the credit.
Lastly, ERTC scams and fraud have been increasing so much
so that the IRS has been warning about these schemes since fall
2020, encouraging businesses to be wary of aggressive ERTC
marketing.
The IRS noted various warning signs for continued
consulting firms that may be bad actors: unsolicited ads;
calls, emails, texts from unknown persons; statements
suggesting that the consultant can determine ERTC eligibility
and tax refund estimates within minutes; larger upfront fees to
assist in determining the filing of the ERTC claims; and
assistance provided under contingency fees that provide the
consultant with a percentage of any ERTC-related tax refund.
In March 2023, the IRS added widely circulated promoter
claims involving ERTC to the newly entered annual dirty dozen
tax scam list. In addition, some are arguing for extensions for
how long employers can claim the ERTC.
But there is a bottom line: Congress did not intend the
ERTC to be used by businesses as a line of capital for years.
The COVID-19 pandemic ended. The ERTC was meant to help
businesses retain employers or employees during COVID-19
pandemic, which is now over.
The focus moving forward should be to eliminate confusion
and clear the backlog of legitimate claims for businesses just
trying to get their refunds they deserve. At the same time, we
need to combat the increasing amount of scams, frauds, and
examine ways to improve the process and to prevent similar
challenges and hardships in the future.
All of these make exploring the ERTC worthwhile. And I
thank the witnesses for being here today.
And with that, I would like to yield over to my friend, Mr.
Pascrell.
Mr. PASCRELL. All right, Mr. Chairman, it is a good,
beautiful day here in Washington.
Chairman SCHWEIKERT. A little sticky.
Mr. PASCRELL. Just like yesterday. I thank you. And I would
like to first, Mr. Chairman, recognize and welcome Mrs. Linda
Czipo, president and CEO of the New Jersey Center for
Nonprofits. We have worked very closely together over many
years.
I appreciate your testimony. I appreciate you being here
today.
Employee Retention Tax Credit was vital to keeping
America's small businesses and nonprofits afloat during the
pandemic. This relief was especially crucial in New Jersey,
where the virus struck early. Our state's nonprofits worked
tirelessly on the front lines of pandemic response and
recovery.
We all want to ensure the ERTC gets out the door to
employers who need it most. But we need to get to the heart of
the issue, resources. Decades of attempts to sabotage and
destroy the IRS' ability to serve taxpayers and enforce the
law. That is what we got to get to, and I am committed to get
there.
You start funding enacted by Democrats has revitalized the
IRS. Get the picture that the other side has pictured giving us
of the IRS. We have guns at our doors. Give us your money while
we are reduced by 80,000 employees, and we were almost
successful under many more.
Americans are finally getting their calls answered by the
IRS. That is good news, right? Wrong? And their refund checks
are on time. That is either true or false.
I want to remind people, every Republican in Congress voted
against making tax time easier. Every one of them. We are good
friends on the other side, but they voted against us.
Why would you vote against that, making taxes easier to
lawfully bring into the Treasury? Like the old saying goes: You
get what you pay for.
Thanks to the Inflation Reduction Act, this filing season
was one of our most successful in years, believe it or not.
Under fresh leadership, the IRS has made enormous progress.
Pull away times were slashed to under 5 minutes. It may not
seem very important in this dreadful movements of life we have
day to day. The backlog of returns was finally cleared.
Now the IRS is using the same playbook to tackle ERTC
claims. In the past 2 months, we have seen nearly a half a
million refunds processed. That is pretty amazing when you have
seen what the IRS had to put up with 6 years prior, and what
they were doing with the least amount of resources they had per
population. Ninety-nine percent of claims are now less than 3
months old.
Most ERTC claims are filed on paper and processed by hand.
So, the IRS wisely directed IRA funding towards electronic
filing and automated processing. Bringing tax administration
into the 21st century means quicker refunds, fewer errors.
We know bad actors target the ERTC. We know that. We can't
deny that. The record will show it. The IRS is already seeking
criminal charges and recovering billions in stolen money.
With the backlog cleared, the IRS is redoubling these
efforts with additional orders. Wealthy tax chiefs have
operated with impunity for years on the Democratic and
Republican administrations. Look at the numbers. How could you
conclude anything else?
Thanks to the IRA, the IRS is finally able to pursue fair
enforcement by collecting what they owe--a fair tax system. You
have talked about it, Mr. Chairman. I talked myself to sleep
about it every day. If we don't have fair tax collections, we
do not have enough money in revenue, and then we got to talk
about taxing people for what they should not be taxed for.
Now, that may be an oversimplification. Check the records.
Every dollar spent on enforcement pays for itself and then
some.
There are some who continue to try and gut these efforts.
They will not be successful. Some of you on the other side of
the aisle, my good friends, even risk economic catastrophe to
erase funds through auditing wealthy tax sheets for Heaven's
sakes. It is a fact. Why deny it? Why say that is not as
important as--the sabotaged risks are progress toward a
functional tax system? It undermines the very efforts we are
discussing in administrating the ERTC.
Thank you, Mr. Chairman, and I yield back.
Chairman SCHWEIKERT. Thank you, Mr. Pascrell, and to the
overall committee chairman, Mr. Smith.
Chairman SMITH. Thank you, Chairman Schweikert and Ranking
Member Pascrell for holding this hearing on the Employer
Retention Tax Credit and challenges that businesses and tax
preparers have faced with this credit.
As the government forced businesses to lock down,
Washington temporarily helped businesses keep their employees
on payroll. That time has passed. Almost a year ago, President
Biden went on TV and told Americans that the pandemic is over.
Yesterday, IRS Commissioner Werfel said the agency has
shifted efforts after successfully clearing the backlog of
valid claims. Yet, according to the IRS' website, as of July
19, the agency still has almost a half a million forms left to
process. This speaks both to how the ERTC has become plagued by
fraud, and how the IRS is failing to process legitimate claims
in a timely manner.
The problems at the IRS were present from the very
beginning. For starters, the IRS forced all businesses to apply
on paper and mail in the application. That has led to long
delays. The IRS told my staff in May that 20 percent of claims
have sat unresolved for more than 4 months. And we have heard
from other businesses who say they have been waiting years.
For small businesses who filed legitimate claims, this has
become a major source of frustration with the IRS. Businesses
have found the IRS guidance confusing, particularly the rules
about whether they are eligible or not. Some have raised
concerns about how guidance has been insufficient and changed,
forcing small businesses to spend more time with IRS rules that
could be spent serving customers.
Just this week, after the Ways and Means Committee
announced this hearing, the guidance changed again. The
guidance changed again this week.
I hope this rule will help clarify who was eligible for
this credit, but clear guidance should have been published a
very long time ago. 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
outright fraud.
The ERTC is on the IRS dirty dozen list of scams. Americans
are bombarded by scammers all day every day--texts, spam calls,
misleading mailers, emails. To be put on the list speaks to the
severity of this issue. We have a system where taxpayers get
ripped off by scammers, while legitimate claims go unanswered
because of a backwards IRS system.
We have someone to testify today who has lived this issue
day in and day out. Larry Gray is a fellow Missouri grad, a
neighbor from back home--I think your farm is across the road
from me--and he is a CPA who has spent decades helping families
and small businesses in south-central Missouri navigate the Tax
Code. He himself was the target of an ERTC scam, and he has
lost clients to competing accountants because he refused to
prepare fraudulent claims.
Thank you for coming to Washington to share your experience
with this program.
I want to thank all of our witnesses for sharing your ideas
and perspectives, to root out fraud, and ensure Washington is
helping those who serve it.
I yield back, Mr. Chairman.
Chairman SCHWEIKERT. Thank you, Mr. Chairman.
A quick introduction. We are going to do the short versions
for everyone.
Mr. Larry Gray is a partner at AGC, a CPA firm in Missouri
and has been a government liaison for the National Association
of Tax Professionals.
Mr. Roger Harris is the president of Padgett Associates--or
Advisors. Sorry about that.
Pat Cleary is the president and CEO of the National
Association of Professional Employer Organizations.
And Ms. Linda Czipo is the president and CEO of the New
Jersey Center for Nonprofits.
Thank you for joining us today. Your written statements
will become part of the record.
I am going to apologize to you now. As you know, today is a
bit of a chaotic day with multiple votes. So, we are going to
go through it. Somewhere during this, we are going to probably
have a vote. You may see some of us moving back and forth. It
is the chaos of the process.
Mr. Gray, please share with us your 5 minutes.
STATEMENT OF LARRY GRAY, CPA, PARTNER, AGC CPA
Mr. GRAY. That is first time I have talked and not heard.
No, again, thank you, Chair, Ranking Member, neighbor, and
members of the House Committee on Ways and Means Subcommittee
on Oversight. I appreciate this opportunity.
You have already done the introduction, but I think some
notes should be noted. For example, yesterday I spoke at the
IRS tax forms in Atlanta on tax law. I have been doing this now
over 45 years. But during that time period, one of the things I
think is important is that I had participated in the tax
system.
Throughout the years, starting in the late eighties until
last year, I served on different volunteer advisory boards to
the IRS. I believe in the tax system. And I think what is so
important here today--and I have kind of got an introduction to
the rest of the panel--and I think the unusual thing, you might
be surprised how we are all on the same page. So, I am not
going to read my testimony, but what I want to focus on is
small business and small accounting firms.
With me teaching nationwide, when the pandemic happened, I
was like everybody else, I couldn't go anywhere. So, I started
doing YouTube. I am old-fashioned, but I learned something
different. And the very first thing that I did three and a half
years ago was a form 7200. There was a way to get a credit for
your employer as an employer before you actually had to wait to
do the quarterly return. That was a good idea. But what
happened was when I had got done, I literally said to the IRS,
I can't believe the fraud that is going to happen. See, it has
been known.
And so, then what happens is that whenever you have a
$5,000 year credit, that is not going to make a big difference
to the fraud. But when that becomes $7,000--and then we got a
lookback that you can qualify for ERTC and PPP, the paycheck
protection both, as long as you don't double-dip in wages, that
is whenever it started.
So, I serve on the National Public Liaison Monthly Meeting
to the IRS. I have got a lot of good friends over there, and I
will say this: Three years ago, they were understaffed, and
they were underfunded. So, with that, what I look at is that I
had no guidance. I am with the IRS sign--there was no guidance
when this all started. It takes some time to get through
counsel and all of that.
So I go on the internet, and so I wanted to see what other
people were doing. So, all of a sudden Google doesn't--I
started realizing these people aren't explaining the law
correctly. So, I took a couple of my companies, small companies
that I knew did not qualify, and so I started shopping the ERTC
mills. Because I am teaching YouTube. I should understand the
experience from the real world.
And so, with that, what would happen is that when I would
look at the advertising, your CPA, your EA, your tax person
doesn't know what they are doing. But yet, when I look at some
of the contracts--here is one, Client acknowledges in a test
that it is eligible.
Here is another one. The client acknowledges they are
qualifying business entity. It sounds to me like I am paying 15
to 30 percent of that up to $26,000 for somebody to do clerical
assistance. Because what happens in it, they also say in those
agreements, they don't do audits. Then also say in those
agreements, maybe they will help you find somebody for the
audit. I got a feeling they won't be here.
And here is what is sad. Anybody can put a number on a form
and see, you don't have to put a reason why. There is two ways
to qualify. You have to do a reason why.
But in that, I want to hopefully see an aggressive, open
Q&A when we get to it.
But, in conclusion, going forward, we need to coordinate
efforts by starting at the top, appointing a chief counsel,
permanent. That has been vacant for, I understand, some years.
Well, that is where I as a practitioner and the community, the
taxpayer, looks at for guidance. We were getting no guidance.
There should have been an ERTC implementation team to
coordinate from the top down. We need education. We need
guidance. The frequently asked questions are out of date. They
say they are historical.
So, my time is about up, and I hope in questions I get the
normal what you are asked. Thank you.
[The statement of Mr. Gray follows:]
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Chairman SCHWEIKERT. Thank you, Mr. Gray.
Mr. Harris.
STATEMENT OF ROGER HARRIS, PRESIDENT, PADGETT ADVISORS
Mr. HARRIS. Chairman Schweikert, Ranking Member Pascrell,
members of the Oversight Committee, thank you for having us
here today.
My name is Roger Harris of Padgett Business Services. We
are an accounting and tax firm that has been in business almost
60 years serving small businesses across the country. We
currently have a network of over 200--around 200 offices.
And this hearing couldn't come at a better time, because
the employee retention credit, while it was a great opportunity
and a much-needed lifeline to small businesses, it is fraught
with fraud as we sit here today. And it is putting a challenge
on all of us in the profession.
I think, however, we have to recognize that because of the
pandemic, we did things quickly, and we did things maybe in a
way that we wouldn't have done in normal times. And I hope that
we can learn from these experiences and not repeat these
mistakes.
In my written testimony, there are some details, but I want
to talk about four main areas, and many of which have already
been mentioned.
The beginning and the first problem was how we submitted
claims to the IRS. There was no question that sending paper
into buildings with paper already there and employees not
working in them, that we were going to have a problem
processing the claims, which led to the second large problem
that we face today, and it is still ongoing, which is the delay
in getting the money out to the people who need it. Any time
you send paper to the IRS, things are going to take much
longer.
We are in the beginning stages of a second problem that I
think has not gotten the attention it deserves yet, is the law
is written in such a way that it is going to require all of the
businesses who receive an employee retention credit to amend
tax returns.
This could be tax returns from 2020, tax returns from 2021.
And if they are an S corporation or a partnership, it would
also require all of the partners and shareholders to also amend
their returns.
So, there could be millions of returns coming in for which
penalties and interest will most likely be charged because it
will be producing additional tax.
So we are going to further stretch the IRS resources for
the small businesses to comply with their further obligation as
the law requires, and it is going to cost small business money
that I think we need to look--and we have talked about an
alternate way to solve that problem--but that is starting, and
it is going to continue get worse as time goes on and more
people receive their funds.
The other thing that we are dealing with today, and you
have heard it talked about by every speaker up to now is the
fraud that is in the system. 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, very
sophisticated. I don't think any of us can turn on a TV or a
radio without hearing an ad from these folks.
And it is stretching the relationship between their
preparer and the mills, as we call them, because, as Larry has
mentioned, we have had clients that we have dealt with for many
years who have trusted our advice. But all of a sudden, when
someone is telling them, your adviser doesn't know what they
are doing, and if you will listen to me, I can give you a half
million dollars.
It is very hard for us as the people who are working with
these small businesses to win that argument, in many instances,
because of the sheer amount of money that is being dangled in
front of them.
And as we have heard, the IRS has no choice but to begin
enforcement actions to try to correct this. And one of the--
Larry mentioned, and Larry and I go a long way back, so we are
going to talk a lot about the same things--is that we need help
on how to deal with these businesses that come to us who took
this money and weren't entitled to it.
And we are asking the IRS for some help of a real-world
solution to give us the ability to try to bring these people
back in compliance. Because there is no way in the world we are
going to audit our way out of this problem. It is going to take
a concerted effort by our industry, the practitioner community,
to help solve this problem, because we are the people they are
coming to today when they get the money. And we actually can't
even amend the returns unless we believe the claim is correct.
So, our only alternative is to say, well, we can make you give
the money back.
But remember, they didn't get all the money. They paid huge
fees. So, we need some real-world solutions to help our people
do what you want us to do, which is to bring the small
businessowner back into compliance because the IRS doesn't have
the capability to do it.
In wrapping up, I do want to say one thing to credit the
current Commissioner. As Larry mentioned, he and I were both in
Atlanta at this IRS forum, and the Commissioner was scheduled
to speak, which he did. But, unannounced, he asked for a
meeting with some of the practitioners that were there that
worked in the ERTC world, and asked us, what did they need?
What did he need to do for us? What did we need from him? So at
least the dialogue has started, and let's hope that it
continues.
And I know my time is up, so I am going to refer you again
for details of my comments in the written testimony. Thank you
for having this hearing. Thank you for inviting us, and I look
forward to your questions.
[The statement of Mr. Harris follows:]
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Chairman SCHWEIKERT. Thank you, Mr. Harris.
STATEMENT OF PAT CLEARY, PRESIDENT AND CEO, NATIONAL
ASSOCIATION OF PROFESSIONAL EMPLOYER ORGANIZATIONS (NAPEO)
Mr. CLEARY. Thank you, Chairman Schweikert, Ranking Member
Pascrell, members of the subcommittee.
Mr. Pascrell, I will begin with a personal observation. I
began this life at St. Joseph's Hospital in Paterson, New
Jersey. So, we both found our way down here to Washington
eventually.
Mr. PASCRELL. One T.
Mr. CLEARY. One T. That is exactly right. Exactly.
I am Pat Cleary. I am president and CEO of NAPEO, the
National Association of Professional Employer Organizations. We
represent approximately 250 PEOs that provide payroll,
benefits, risk management, regulatory compliance assistance,
and other HR services to more than 173,000 small and midsized
businesses employing more than 4 million people.
Our members account for more than 90 percent of the
industry's $273 billion in revenue. Almost 15 percent of
businesses with between 10 and 99 employees partner with a PEO.
I am glad to be here today representing small and midsized
businesses or SMBs, as they are called, especially the hundreds
of thousands who are waiting for their ERTC funds.
PEOs are champions for their small business clients and
their employees by providing payroll benefits and HR services
and assisting with compliance issues under State and Federal
law. PEOs allow small businesses to improve productivity and
profitability, and to focus on their core mission and to grow.
Companies that use a PEO grow faster, have more engaged
employees, have lower turnover, and twice the survival rate of
companies that don't. Among many services provided by a PEO is
guiding small businesses through the process of applying for
the ERTC. That is why we are here today.
Also, through a PEO, the employees of small business gain
access to Fortune 500 employee benefits such as healthcare,
dental, vision care, life insurance, retirement savings plans,
job counseling, et cetera, that they wouldn't normally get as
employees of a small company.
Above all, though, I think what we are most proud of as an
industry is in the dark days of the COVID pandemic, PEOs
ensured that their clients stayed afloat by securing PPP loans,
and later, loan forgiveness, managing employee leave, applying
for available tax credits, allowing the businesses to focus on
managing--on remaining viable and staying alive.
In fact, businesses that use the PEO during the pandemic
were 60 percent less likely to permanently close than those
that did not use a PEO during the pandemic. And they received
PPP loans and loan forgiveness at nearly twice the rate of
businesses that didn't use a PEO. In short, PEOs helped tens of
thousands of businesses survive the pandemic. And, again, we
are proud of that.
So, now we have got this new challenge. We have been
sounding the alarm about this huge backlog of unprocessed ERTC
claims for more than a year. We engaged when the backlog was
around 200,000. We watched it grow to more than 1 million. It
currently stands at 488,000, having grown again in the past
month. In short, it is moving in the wrong direction. And don't
think of these as mere numbers. These are businesses. These are
people.
And the problem is much bigger than the numbers indicate. A
lot of claims are filed on an aggregate basis, like ours. So,
it means multiple small businesses claims are filed together on
the same form. The IRS counts these as one case when there
could be hundreds or thousands of businesses on that form, all
stuck in the backlog, and waiting for these critical funds. For
example, a PEO with 10,000 unprocessed claims is counted as one
by the IRS.
A recent survey of only 43 of our 250-member PEOs revealed
that 18,000 small business clients are still waiting for the
IRS to approve almost $3 billion worth of claims for ERTC
credits that were filed before 2023. Almost 4,000 of these
claims date back to 2020. It is completely unacceptable,
Yesterday, Mr. Smith referred to this, the IRS Commissioner
said the backlog had been eliminated, adding that 99 percent of
remaining claims are 3 months old. It is simply not true. As of
a week ago, July 19, the IRS website said that the backlog was
488,000. You have got some context. Most, I was going to most,
many States don't have 488,000 small businesses.
I know the big focus of today's hearing is on fraud. I
don't know how many allies the IRS has had in its fight against
fraud, but I can tell you that we have had a good relationship
with the IRS, we have stood shoulder to shoulder with them on
this issue to prevent fraud in this program, repeatedly warning
our members, and giving them materials to help them warn their
clients about so-called ERTC mills, which proliferated as the
processing delays that the IRS continued, and the backlog grew.
But make no mistake, this backlog has been the single,
biggest business development engine for the fraudsters and the
mills. Had there not been a backlog, there would be no ERTC
mills preying on small business. And Chairman Smith noted that
they have created this environment for these mills to exist,
and that is true. These companies are desperate for money they
are promised.
It is funny, just as we were preparing to come down here, I
made the mistake and pick up a call from a number you don't
recognize. And it was some cheery person, Heather, calling to
say, Hey, had you gotten your ERTC money yet? And I said, no,
it is funny you should call. I am on my way to Capitol Hill to
testify in a hearing that is going to put you people out of
business. That is the thing.
So, crickets. So, there was dead silence on the phone. So,
I mean, she didn't know what to do.
Chairman SCHWEIKERT. And they are always named Heather.
Mr. CLEARY. Heather. Why is that? Another hearing on that I
think for this committee would be really important.
So, the IRS were trying to triage this problem. I would
tackle the PEO claims first. PEOs should inspire a higher
degree of trust and confidence. Because we have got ongoing
relationships with established businesses that we work with,
and they specialize in compliance--we specialize in compliance
assistance. Compliance is what PEOs do. The IRS could pull out
those claims today and process them with a high degree of
certainty about their validity.
In fact, the Commissioner's lengthy statement and his
lengthy statement yesterday, he identified the key indicators
of fraud, like what to look out for. None of them----
Chairman SCHWEIKERT. And may have to come back to those.
Mr. CLEARY [continuing]. And none of them applies as it
turns out. So, we know firsthand the hardship that the ERTC
backlog is causing for small businesses across the country
because we hear from them every day, every day. PEOs have
longstanding relationships with many of their clients and have
become invested in their success. Catalogs, most of these
stories on ERTC delays hurts small business.
Chairman SCHWEIKERT. And with that, we are going to have to
go way over time. Ms. Czipo.
Mr. CLEARY. I will stop and take questions later. Thank
you.
[The statement of Mr. Cleary follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
STATEMENT OF LINDA M. CZIPO, PRESIDENT & CEO, NEW JERSEY CENTER
FOR NONPROFITS
Ms. CZIPO. Good afternoon, Mr. Chairman, Ranking Member
Pascrell, members of the committee, thank you for the
opportunity to be here today.
Again, my name is Linda Czipo. I am president and CEO of
the New Jersey Center for Nonprofits. We are a statewide
network champion and service organization for the charitable
nonprofit community in New Jersey. We are ourselves a 501(c)(3)
public charity, and we are part of the National Council of
Nonprofits Network.
Our message is essentially the same as what you have heard.
We are all here for the same reasons. We want to reduce
confusion. We want to combat fraud. We want to eliminate the
backlog.
I do want to underscore some points when pertaining
specifically to the charitable community, because it is hard
to--you can't overstate the essential role that charitable
nonprofits have played in COVID-19 pandemic response and
recovery. But it is also hard to overstate how important the
ERTC has been for the ability of nonprofits to continue serving
our communities.
Even before the pandemic, nonprofits were challenged by
steadily rising demand with resources that were not keeping
pace. And the prolonged health and economic crises spurred by
the pandemic exacerbated this to an unthinkable degree,
stretching organizations to the breaking point when your
constituents were turning to them in record numbers.
We know that in this context programs like the PPP, like
the ERTC have been absolutely critical for nonprofits to
continue to serve people and communities that need them.
We know that participation in the ERTC is very high. We
actually, our organization ourselves received an ERTC credit.
Our process was comparatively smooth. We filed
electronically with the help of our accounting firm and payroll
company. But we know that that is not the experience that every
nonprofit had. One of the issues is of course complexity.
First, I want to thank Congress for structuring the ERTC as
a payroll tax credit to allow nonprofits the opportunity to
participate. But the sheer complexity, repeated changes to
guidance, and in some cases guidance that didn't necessarily
apply readily to nonprofits, created or exacerbated the
confusion.
During 2020 and 2021, the criteria or guidance changed no
fewer than four times. And think about this. It says in a
climate where nonprofits are trying to work to save lives in
the community. They are trying to grapple with frontline
people, unprecedented demand for their services.
And in this kind of climate, trying to juggle meeting
demand and trying to navigate these requirements was extremely
difficult. They didn't have the human capacity or resources to
be able to try to figure this out at the same time. So, what
this meant was, of course, widespread confusion and, in some
cases, missed opportunity for relief.
For every organization like ours that received ERTC, there
are hundreds or perhaps thousands of others that were not aware
of what the requirements were, or unable to take advantage of
them because the process was perhaps too burdensome.
We, too, like everybody at the table, along with our
network and counterpart association have tried to work to
educate the community about the program, encourage eligible
organizations to look into it, but also to be wary of fraud.
We, ourselves, had the experience of an unscrupulous provider
contacting our members, saying they were working with us when
it just wasn't true.
So, we understand firsthand. And what this underscores is
the need for ongoing communications, education from trusted
resources in and outside of the government to ensure the
program reaches employers as Congress intended.
So just a few recommendations on--again, we have a more
detailed statement. I am happy to entertain questions.
Ensure that from the outset, relief programs are structured
to ensure equitable access for charitable nonprofits--that
means payroll tax credits--that structure was critically
important, but also making sure that rural grassroots and
organizations that address historically marginalized
communities can participate. Simplify the eligibility process
and application process at the outset so that smaller entities
can participate. Provide ample opportunity and resources for
education resources, training, and application assistance.
Because, again, in the charitable nonprofit community,
organizations are immersed in service delivery and dealing with
the crisis at hand, which doesn't leave a lot of time to
analyze and navigate complicated systems.
And, of course, to the greatest extent possible, put
safeguards in place to protect against predators and scam
artists.
So, again, we thank the committee for the chance to be
heard today. We stand ready to work with you on this important
issue. Thank you very much.
[The statement of Ms. Czipo follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman SCHWEIKERT. Thank you, Ms. Czipo.
As you are going to see, we are going to do some juggling
because we are also going to have a vote series. Always
remember you are on lots of televisions all over the campus. It
is just the nature, so--and I was going to have Mr. Steube go
first.
Mr. STEUBE. Thank you, Mr. Chairman.
My questions are for Mr. Harris.
Numerous employers have come forward with their stories
about months, and even year-long delays, in processing their
Employee Retention Tax Credits. In some cases, it is millions
of dollars of these credits claimed by employers. How has the
complexity of ERTC returns contributed to the backlog that
employers are experiencing today?
Mr. HARRIS. Well, I think there has been a lot of factors
that have contributed to it. I think we start with the way that
we initially ask for the credit, which was just the filing and
the paper. I think that is the biggest contributor.
Complexity has been a problem in many instances,
particularly, with the retroactive and coordination with PPP
loans. So those of us that have tried to do things correctly,
it was a complex calculation, and it took some time. I can't
speak to how some of the mills dealt with this, because I think
they sometimes found shortcuts that we couldn't find.
But I think the real issue started with the fact that we
knew--a lot of the problems in this program were predictable.
They were things that we could see coming. Any time you ask
paper to be sent--and as I said in my opening statement--into a
building with nobody working and already paper backed up,
delays shouldn't have been a surprise. But complexity is a
problem in all of the Tax Codes, not just this.
Mr. STEUBE. And in your testimony notes, there were
suggestions were given to the IRS to improve the ERTC
processing. Can you elaborate on what those suggestions were
and whether the IRS was implementing those suggestions?
Mr. HARRIS. We made a couple of suggestions, and others
did, that, number one, recognizing the fact that these were
going to be sent into bills, that we had to do paper. That
there should be dedicated post office boxes, identifications.
Some way of prioritizing these claims above the normal
workload. Because, again, we were in the middle of a pandemic.
These were funds to provide lifelines to small businesses, and
yet they just fell in.
So, we did not see any of the suggestions that we may have
taken. I know others had different things allowing them to be
claimed on a current-year process return that could be filed
electronically. So, I think we just fell back into the way it
was always done, and in that case, we had great delays.
Mr. STEUBE. Do you have any other suggestions that would
avoid some of the backlogs that we have seen in the future?
Mr. HARRIS. Well, I think, generally speaking, and again,
if we have the time and we are not in a pandemic, we should
always look for ways not to--today, what we are doing is
solving a problem. I would like to find ways with the IRS to
prevent the problem.
Mr. STEUBE. Right.
Mr. HARRIS. And I think one of the ways to do that is look
for alternate ways; take advantage of electronic filing; take
advantage of things that are currently being done; and be
creative in terms of just being this is the way we always did
it.
Mr. GRAY. If I may say something to add to that? I
mentioned the 7,200, and it came out, and saw it was very
fraudulent. It was a fax number end. In that case, the IRS did
step up to the plate on it.
But I think the other thing, the form being filed with just
a number on it. See, there are two--there is a startup
business--but the main way to do this--there are two ways to do
it. If they would have at least put a code on there and said
one is based on gross receipts, they already have that
information on the income tax returns.
Where all the fraudsters have come from is not from the
gross receipts tests and deficiency, which was the company
hurting most, if they would have had to two pipelines just that
in and of itself would have moved the companies with the
biggest losses, because there was no decision on that other
than a calculation. And the auto part was just to verify with
income tax credit. So, all that got thrown in with the other.
And then, when the offer mills come along--but the most
important thing if they this--put toward at least two codes,
again, the company losing the most money would have been the
first taken care of, which, to me, was very important.
Mr. STEUBE. Well, that kind of leads me to my next
question. How has the fraud and the scams impacted the backlog
that employers are facing today?
Mr. GRAY. I guess that was directed toward me. I think the
big issue is the fact that you are getting all of these
quarters with a number changed and no reason why. So how do you
audit something?
And so, what happens, you know, the demand. And as I said
in my printed statement, the reason why we are all here today
is to get the right money to the right qualified employer. And
we all want it to run faster.
So, I think the other thing would be is that Budge and I
attend monthly meetings here in D.C. Three years ago, I seen
the problem coming. But I think what happened was is when you
are pulling off thousands of people in compliance over to take
care of the EIP and the 1040 rebates and credits, then you have
got a shortage of staff, and these papers are piling up.
It is amazing, for example, a 1040-X, and I believe 941-X
also, even if you do that electronically--no it is a 940-X, you
do an amended return, and you think you are e-filing it, they
actually print it out and scan it in.
Chairman SCHWEIKERT. No.
Mr. GRAY. Okay. I do want to say, in my comments, I was--we
do have a new Commissioner, and I think over the last few
weeks, they are starting to listen.
Mr. STEUBE. My time has expired. Thank you, guys, for being
here today. I appreciate it.
Chairman SCHWEIKERT. Thank you, Mr. Steube. Ranking Member
Pascrell.
Mr. PASCRELL. Yes, I very much read the report that came
out yesterday from the IRS, updated all the numbers that we
have heard turn around here today. There is a summary for that
report as well. It is a four-pager. In that summary, and in the
report itself, the IRS is telling us that this problem started
in 2019, and was seen throughout 2020. And they realized they
had to do it. I would agree with Mr. Gray that Mr. Werfel is
the guy right now. I think he knows what he is doing. He will
not jump just to make us happy that things are happening.
Because we want it not only to be a solution--one of you said
this--we want it to sustain itself and try to reduce the amount
of hesitancy that exists right now so people, the consumer
doesn't have to wait so long.
Ms. Czipo, you stated that two-thirds of the respondents to
a survey reported receiving COVID relief from the government.
That is a lot of people. What type of education and outreach
services did your organization conduct to make nonprofits aware
of the ERTC? Be as brief as possible. I have got a number of
questions.
Ms. CZIPO. Yeah, we did, along with our counterpart
associations, workshops, webinars, recorded videos, emails,
social media to try to reach our members, our network in New
Jersey of 5,000-plus. And, of course, the reach of our
counterparts across the country is very broad.
We wanted to make sure that organizations were aware of the
programs, the changing requirements; also, quite frankly, the
warnings against not falling for the scams. But we wanted to
make sure of it--and we still do this to this day--we still
hear from members that don't know that nonprofits are eligible
for this program.
So that education is ongoing. And we know that we have
reached a lot of organizations that might not have otherwise
known about this.
Mr. PASCRELL. I agree with that. You discussed the need for
more education and clearer processes to help nonprofits
navigate the ERTC. How can education and streamlining the
application, critical to what we are talking about here, help
cut down on the scams targeting vulnerable organizations?
Ms. CZIPO. Well, that is really a key, key point because I
think one of the biggest roots of the proliferation of the scam
artist was the complexity of the program. You have got
organizations, as we talked about, on the front lines trying to
meet unprecedented demand for their services, but they also are
dealing with lost revenue, canceled programs, and the like.
And so, you get somebody coming into your door, you are
going to try to listen to them. Because this is not what you
are specializing in. The simpler we can make this, the easier
it is for organizations to deal with.
That is part of the reason why time, extra time to apply
also matters. Because organizations have to analyze their
systems and whatnot. And making that choice between am I going
to serve the person who is at my door today, or am I going to
be to stop and look at this morass of guidelines that may
change next week is a really, really hard choice to put on a
nonprofit.
Mr. PASCRELL. What did your organization experience when
claiming and receiving the ERTC? And what type of information
did your organization need to gather and provide to your
accountant? That is a tricky thing here we are talking about.
Ms. CZIPO. It is. And there is a reason we didn't apply
right away either because we also--we are a small office.
Mr. PASCRELL. Right.
Ms. CZIPO. And we had to figure out if we might be
eligible. And we had to work with our accountant and provide
payroll records and provide our financial records so they could
help us analyze whether our gross receipts had gone down
enough.
And, of course, the moving target of the definition of
gross receipts also was a problem for the charitable community.
And then look at our payroll records. So, it is a multi-step
process.
And that is part of the reason that we were also trying--we
were in an emergency mode as well. And so, trying to navigate
that was a lot bit challenging. And our process was a little
smoother than some, but it definitely took some time. And there
were a lot of steps.
Mr. PASCRELL. My final question, quickly, what lessons
should Congress take away from the ERTC implementation that can
guide the design of future tax relief programs for nonprofits?
Ms. CZIPO. The biggest message is the fact that this was
structured as a payroll tax credit, which allowed nonprofits to
participate. That was the huge, huge win for nonprofits. It
really was a lifeline. Any further future programs, if they can
be structured that way, that will make a huge difference for
the community.
Mr. PASCRELL. Another question will lead you to about a
two-hour answer, but it is a complicated process. But thank you
for your testimony. Thank you for all your testimony. You have
helped beyond what you even think.
Chairman SCHWEIKERT. Thank you, Mr. Pascrell. And if you
are going to go vote, we will say nice things about you when
you are gone.
Ms. TENNEY. Thank you, Mr. Chairman. Just thank you for
holding this hearing. Thank you to the witnesses. We appreciate
your testimony today. And I thought maybe I could follow up on
Mr. Pascrell's question, maybe with Mr. Cleary.
What do you believe--we were just talking about how we
would have made this program better. Do you believe that the
way that the IRS calculated this program as a payroll tax
credit? Is that something that you thought was in error,
resource, or it could have been fixed? Just quickly because I
am just curious about your response to that.
Mr. CLEARY. Yeah, I don't know. And the tax experts here
would be in a better position to answer. But what I do know is
when they did a surge and put a bunch of people on the case,
the backlog came down. That is easy.
So whatever else was happening inside of the bubble, for
us, it was just a matter of applying resources to the problem
and trying to drive the backlog down. Because that is really
our big problem. Many times, you have got 500,000 cases. We
have got thousands and thousands and thousands of cases in that
subset that are held up.
Ms. TENNEY. Well, let me ask you, while we are on the
backlog, do you think that the way the IRS calculates the
number of unprocessed Employee Retention Tax Credit claims is
accurate--is it accurate the way they are processing it, in
your opinion.
Mr. CLEARY. Well, no, because as I mentioned in my
statement, for PEOs that--it could have a very small PEO may
have 100 claims with the IRS. Large PEOs may have tens of
thousands of claims. Each PEO is counted as one. So, if we get
250 members, that is 250 claims that the IRS counts when I
have----
Ms. TENNEY. As one.
Mr. CLEARY. Yeah. It could be tens or hundreds or thousands
of cases.
Ms. TENNEY. So, Mr. Cleary, I will stick with you for a
minute. The IRS claims to have doubled the amount of Employer
Retention Tax Credit claims that they process every week from
processing 20,000 claims per week during the filing season down
to 40,000 claims per week.
So just yesterday, the IRS issued a press release where
Commissioner Werfel stated that the IRS had successfully
cleared the backlog of valid ERTC claims. They even said it was
99 percent done. So, from your experience, and you just
indicated this, does it seem like the ERTC backlog has been
cleared?
Mr. CLEARY. No. And, in fact, their own website a week ago
said that it was almost 500,000 in the backlog. So, they didn't
clear that out in a week.
So that is the first problem that we are seeing occur with
this. And you see again in the last week that it ticked back up
by another few hundred thousand. So, it is almost at half a
million. So, whatever the problem is, there is something out of
whack with the count.
And I agree, we wish the Commissioner well. As I said, we
have had a really good relationship with the IRS. But for his
credibility, I think first shot out of the box he needs to be
credible and truthful in terms of describing what the backlog
is.
Ms. TENNEY. Well, we thank you for that, but the exact
number is actually 488,000 right here. So, we know that there
is a huge backlog. So, to claim that somehow these are done--
and we appreciate what you do as PEOs as a small business
owner.
Mr. CLEARY. Thank you.
Ms. TENNEY. We are dependent on PEOs and the great services
they provide in helping us get through some of the confusion
and difficulty in dealing with the IRS. And we understand the
bureaucracy. We know it is difficult.
But this is real money. And we have low margins in small
businesses. And we appreciate that what you do--and we
appreciate that you on top of this. And when I have met with so
many small businessowners, the first thing that everyone says
is the 941-X form. Oh, you know, I just hear it, and it is
problem, and the IRS needs to solve it.
And we appreciate the work you do to advocate for people
who are in this position, especially the small businessowners
that don't have the resources and the compliance teams and the
lawyers and accountants to really make it happen.
So, we have work to do, and the IRS needs to clarify this.
And it would be nice if the Commissioner would come out and
admit that we have almost a half a million claims that are
still out there with businesses struggling to get this right
and struggling to comply with the law.
Mr. CLEARY. That is right.
Ms. TENNEY. So, we appreciate all the witnesses. I think we
have got to run to go votes. But thanks so much. And thank you
to all of you again for your expertise and also for being
willing to come here, as Mr. Schweikert said to be on national
TV and have everybody on the Hill watching you guys.
Mr. CLEARY. Thank you.
Ms. TENNEY. Thanks so much.
Ms. VAN DUYNE [presiding]. The chair now recognizes the
gentlelady from California, Ms. Chu, for 5 minutes.
Ms. CHU. Ms. Czipo, I want to thank you for your testimony,
and I appreciate that you recognize that this credit was
absolutely vital for many of the nonprofits and businesses who
claimed it.
Congress created the ERTC on a bipartisan basis in the
CARES Act. We asked the IRS to set up a new refundable credit
at the same time that the agency was working remotely because
of the pandemic and sending economic impact payments to every
taxpayer.
The credit nevertheless provided absolutely critical
support for establishments that were closed down or restricted
by government orders to protect public health.
And because of that, and the other pandemic aid programs,
like the Paycheck Protection Program, our economy bounced back
faster and stronger than any of our peers.
But I recognize that the ERTC has faced immense challenges
and has been a burden so far to too many entities instead of
helping them.
And one of the lessons is that the IRS simply did not have
the resources to properly administer this credit. They could
not accept electronic forms. They did not have enough
employees. Their systems were outdated and overburdened.
That is exactly why Democrats passed the Inflation
Reduction Act and reversed over a decade of Republican cuts to
the agency.
And the results are clear: The IRS just yesterday reported
that they were able to add new staff to address the surge of
filings and clear the backlog of old claims, giving them the
ability to focus on new claims and fraud mitigation.
So, Ms. Czipo, can you talk about whether the increased
resources for the IRS provided by the Inflation Reduction Act
are helping nonprofits and businesses to get the help they need
from the agency and whether you believe that cutting these
funds for the agency would hurt taxpayers and hinder their
ability to smoothly claim ERTC and other credits?
Ms. CZIPO. What I would say is yes. Certainly, the
backlog--we were dealing with unprecedented crises certainly
with the pandemic. That is the understatement. And more IRS
resources means more ability to process applications, to
provide guidance, to answer questions.
We certainly recognize that the changes in the guidance
were the result of efforts to try to swiftly address an
unprecedented crisis. So having more hands on deck, if you
will, certainly makes the odds of that process going more
smoothly, it certainly increases that quite a bit.
So extra resources at the IRS, we think, is certainly a
very strong and important aspect of making the program run
smoothly now and in the future.
Ms. CHU. And let me address a specific issue, which is that
businesses are required to file a 941-X form with the IRS on
paper rather than electronically.
Fortunately, the IRS has said that they expect Form 941-X
to be eligible for electronic filing starting next year. It is
a commonsense improvement made possible by the resources that
Democrats provided to the IRS under the Inflation Reduction
Act.
So could you talk about how electronic filing will help
nonprofits and businesses claim the ERTC and make other
amendments to their quarterly taxes moving forward?
Ms. CZIPO. Certainly. Electronic filing speeds up the
process exponentially.
And we were actually able to file electronically. I was not
aware of the point made that the IRS prints out the forms. But
we filed our form electronically. Our process went smoothly. We
had our credit back within 8 weeks.
So, we have seen firsthand that it can work very well. And
I think the more the process can be streamlined and remedies,
like electronic filing, clearer guidelines, more consistent
guidelines from the outset, making sure that things are simple
so that as many organizations, eligible organizations, can take
advantage of this as possible, that is all really, really
important.
Ms. CHU. And I heard from all of you about the unscrupulous
vendors who targeted the small businesses, you also eloquently
talked about that, and it pressured them to apply for tax
credits that they may not qualify for just so that they could
collect this commission.
I heard from CPAs that this problem is pervasive, and
unlike the types of fraud we saw with other pandemic programs,
oftentimes the applicants making the improper requests for aid
are doing so with no ill intent, but simply because they were
misled.
And I heard that the IRS is distributing information to
make sure that we do not have these fraudulent claims and that
we can identify them earlier. And I certainly hope that that
can help in this process.
And I yield back.
Ms. VAN DUYNE. And the chair recognizes herself.
We have many roles here in Congress, and one that stands
out the most important is providing constituent services and
helping them weed through the never-ending bureaucratic tape.
But at the top of that list is the IRS. Nobody likes paying
taxes, which is really made more painful when the IRS does not
do its job. And that is what we are here looking at today.
Congress enacted the ERTC at the beginning of the pandemic
to provide rapid tax relief to eligible employers who kept
employees on the payroll despite being harmed by the pandemic.
The outdated IRS process that employers must use to claim
the ERTC has not worked well, and it has contributed to the
backlog of unprecedented unprocessed returns that resulted in
many employers waiting 2 or more years, as we have heard today,
for their claims to be processed.
And despite the fact that the IRS is making it difficult
for legitimate claimants to receive their tax funds and tax
returns, the IRS is doing a very poor job of preventing fraud.
And, as of April 20, IRS Criminal Investigations initiated 122
investigations involving over $1.2 billion of potentially
fraudulent ERTC claims for tax years 2020 to 2022.
Mr. Cleary, you have got your Heather. I have got my Deb.
Oh, is she going to play? Oh, come on.
[Voicemail message played.]
Ms. VAN DUYNE. Who wouldn't call back on this?
Chairman SCHWEIKERT. Is her name Heather?
Ms. VAN DUYNE. Her name is Deb. I didn't have a Heather. I
have a Deb.
But it is amazing to me how many of these calls I have
gotten. And, by the way, I called back. You answered the phone.
I called back today--or I called back, and they still keep me
on the list. And I tell them who I am. And, yes, while I may
have employees, I guarantee you I am not eligible. And they
still keep me on that list.
So, we have learned that these ERTC mills have been
approaching businesses and telling them that they qualify for
the ERTC, even though some of these businesses were already
told by their tax preparers that they don't qualify for the
credit.
So how prevalent do you find this issue if I am getting
calls and you are getting calls just this morning? And do you
think it has led to an increase in improper ERTC claims?
Mr. CLEARY. A hundred percent. And to your question, like,
who on Earth would call these people back? The answer is
simple: desperate businesses.
Ms. VAN DUYNE. Yeah.
Mr. CLEARY. So, on our website, ``ERTC delays hurt small
biz,'' there are just scores and scores and scores of first-
person accounts of people who closed their business, moved
their manufacturing operation, shut it down, refinanced their
homes, gave up their pensions, everything for this. They are
desperate.
And that is why I said the easiest way to clear the--or get
rid of the mills is clear out the backlog. People are desperate
for the money. They need it to stay alive. And so, if I am
going to wait and I don't know how long, because there is no
way to find out where my claim is, then I am going to call
Heather back and say, ``What can you get me?''
Ms. VAN DUYNE. Yeah.
Mr. CLEARY. And that is real. That is what is happening out
here.
Ms. VAN DUYNE. So, some of these ERTC mills offer refund
anticipation loans, in which they loan employers a certain
percentage of their expected ERTC refund and, in the meantime,
charge them interest-only payments.
Would such a refund anticipation loan from an ERTC mill
increase the level of risk that an employer is exposed to?
Mr. CLEARY. Well, sure, there is that.
And then the other problem we keep saying--and, again, we
have been shoulder to shoulder with the IRS in warning our
members and make sure they warn their clients, like, don't get
in bed with these people.
Because the other issue--I think Roger alluded to it--is,
where are these folks going to be in a year? So, when you get
audited, where are they going to be? Gone.
Ms. VAN DUYNE. Gone. They got their money and now they are
gone.
Mr. CLEARY. Absolutely. Cardboard stand in the airport,
they folded the tent, and they went----
Ms. VAN DUYNE. I have a quick question. You had answered
Ms. Tenney's questions a little bit about some of the struggles
that they are going through to file their taxes. But just as a
follow-up, when Commissioner Werfel was here before this
committee, he claimed that the IRS would process oldest claims
first.
Mr. CLEARY. Yeah.
Ms. VAN DUYNE. Have the PEO industry and their clients seen
the oldest claims processed first?
Mr. CLEARY. No. We have 4,000 claims from 2020 that we know
about and probably more than that. That is just a sampling of
our members, less than half of our members that had 4,000
claims from 2020. So, no.
Ms. VAN DUYNE. What are they telling you? What does the IRS
tell you when you call?
Mr. CLEARY. Not a lot.
Ms. VAN DUYNE. All right. Well, thank you very much.
Mr. CLEARY. Thank you.
Ms. VAN DUYNE. My time has expired.
Who am I recognizing next?
Oh, Mr. Schneider is recognized for 5 minutes.
Mr. SCHNEIDER. Thank you so much.
And thanks to the witnesses for sharing your stories.
Obviously a lot here, and I appreciate you bringing your
expertise to us.
I appreciate the work you do. I am the son of a CPA. I
worked for him summers. I started my career at Pricewaterhouse
on the consulting side, not the accounting or tax side.
Mr. GRAY. Smart move.
Mr. SCHNEIDER. But I know what it was like. I worked for a
local firm in Chicago. It was then Blackman Kallick. So I
appreciate this.
Mr. Gray, you put something in your written testimony that
struck me, struck me to the core, because you are saying you
are hearing practitioners--and my dad was a--he worked with a
firm, started out of college, became a partner. They sold that
firm to a bigger firm, but then he left and started his own
firm again. So I know what your firm is like, and I know what
your clients are like.
You said there are practitioners giving up, saying they are
done, that they are going to lose to these corrupt mills, why
not join them. And I know there are bad actors in every
industry, but every accountant I worked with, know, I was
pretty confident that they were straight shooters.
My dad raised me--I mean, if they overcharged me a penny on
a check, I am going to make sure that they knew it. But if they
undercharged me a penny, I was going to make sure I paid it.
Mr. GRAY. Yes.
Mr. SCHNEIDER. That is the accountant mindset.
Mr. GRAY. Yeah.
Mr. SCHNEIDER. Could you go a little bit more about these
people who are joining rather than fighting the mills?
Mr. GRAY. I would say that, if we go back 3, 4 months, I
would have never thought you would hear that.
But I think also part of the deal is by--I think part of it
is the complexity of the law. And so what happens is, when you
are trying to explain it to people, this party is not charging
all of these great fees, but the thing about it, it has changed
the definition of qualifying. And so partly the law itself is
complex.
And, secondly, there is no guidance. When you think about
it, you go to IRS.gov, and it will lead you to frequently asked
questions. And when you pop it up, it says these are
historical. Where do I go for guidance?
Mr. SCHNEIDER. Right.
Mr. GRAY. That is small business.
Well, now what happens is I had a friend in Illinois that
she just lost her largest client. And the problem is that--here
is a great big one I see a lot of pushback on.
If I as a CPA and you come to me and I have told you that
you don't qualify and you go to the mill and get the money,
then I can't--and it just got issued in March by OPR----
Mr. SCHNEIDER. Yeah, and I am sorry. I am going to have to
reclaim just because of time, but I think that is a key point.
And, Mr. Harris, you kind of touched on this about how--and
I am going to put it back to us on this committee--how can we
find a way to help you and your franchisees in this case bring
people back into compliance?
Mr. HARRIS. Well, we need real world solutions. We have
people who--to Larry's point--they listen to us in the
beginning until some very slick ad, like we have seen here,
gets them on the phone, and all of a sudden, they have a half-
million-dollar refund that they are due, of which they only get
$400,000 at least; $100,000 goes to the person that did it.
So, they come to us, and we can't amend the returns because
we have been told we are not allowed to. And yet you want us to
pay back $500,000 when we have only got $400,000.
Mr. SCHNEIDER. Yeah.
Mr. HARRIS. We need to work together, our community with
the IRS, and Congress, when necessary, to recognize that some
small businesses have been trapped in a situation that all of
us would have been tempted to be trapped in.
Mr. SCHNEIDER. I hear you, and I appreciate that.
And maybe I will turn to Mr. Cleary. Two questions.
The first one is, are your clients, because you are
representing thousands of--your members represent thousands,
tens of thousands of companies, are they applying multiple
times for the ERTC? Are they applying and waiting and then
going to these mills? That is kind of the impression I have
from what you are saying.
Mr. CLEARY. Oh, that is a great question.
No. I mean, it is either--you choose your lane. So, I mean,
they throw in with their PEO, which they typically do, and say,
``Hey, can you help me get this?''
Mr. SCHNEIDER. And then, because it is taking so long, they
are not picking up the phone and talking to Heather or Deb and
saying, ``I want to do it again.'' That is not what you are
saying.
Mr. CLEARY. I hope not. I think--I am looking at these
guys--that would be really dangerous if you had both of them
going at once because then you are going to end up in----
Mr. SCHNEIDER. And I am short on time, so I will just wrap
up.
The ERTC, as you guys have all noted, we were dealing with
a wildfire, my analogy. We were throwing blankets on that fire.
We knew there were holes in them. But the ERTC saved more than
a million--1.3 million jobs--and we have grown the U.S. GDP by
$135 billion, we have seen over the last months. It slowed and
then helped to staunch that fire. So I think it was critical.
Do we learn from it? Yes. Do we cut the backlog? Yes.
Mr. Cleary, you mentioned that the backlog is growing
again. It is because people are applying again. And 500,000 is
a big number.
Mr. CLEARY. Yeah.
Mr. SCHNEIDER. How many small businesses are in the United
States?
Mr. CLEARY. Well, more than that. But remember, the 500,000
includes hundreds of thousands that are counted as one.
Mr. SCHNEIDER. It is almost 32 million.
Mr. CLEARY. But if you are one of those businesses, it is
all the marbles.
Mr. SCHNEIDER. I get it. Every one----
Mr. CLEARY. It is all the marbles. That's starfish.
Mr. SCHNEIDER. One, we need to cut it out and get it to
zero, and that is the goal. But I don't want to overstate the
numbers. It is a significant number, but it is not the majority
of businesses, as might have been implied.
I yield back.
Chairman SCHWEIKERT [presiding]. Mr. Feenstra.
Mr. FEENSTRA. Thank you, Mr. Chairman.
I just want to probably take a little different vein and a
different approach. I am here to try to figure out solutions,
what we can do.
I have 39 counties that I represent in Iowa, and they all
are rural. They are all small Main Street businesses.
And this was a great thing, the Employee Retention Tax
Credit. It did exactly what it did, it sounded like. It created
payroll at a time when the government was requiring businesses
to shut down. So, it was very critical.
And I get it. I mean, when you roll something out so fast,
you are trying to resolve something, you are going to have a
lack of clarity, you are going to have a struggle with
eligibility, and stuff like that.
But think of how much time has gone past now since this
actually occurred. I mean, it has been almost 18 months to 2
years. And we still have businesses that have little guidance
from the IRS, little education on who qualifies, and very
little customer service, which all my small businesses are
really struggling with.
So, my question is this. Mr. Gray, what can we do,
solution? It seems like there is a lack of education or there
is a lack of IRS guidance on the ERTC. And, obviously, it is
creating fraud, related to fraud.
Do you have any solutions on what we can do in this area?
Mr. GRAY. Excellent question. I am glad you asked it. I
will try to be quick.
Number one, like offshore accounts and they did with the
cryptocurrency, send out some soft letters, send out. So, if
they right now would send a letter to everybody that has got
the credit and everybody in the future and in this letter say,
``You need to file the amended return, the income tax return,
here are the most common reasons,'' like they just issued this
counsel memo on the supply chain----
Mr. FEENSTRA. Yeah.
Mr. Gray [continuing]. That right there, that letter
yesterday changed a client.
So, communicate in this letter these are the most common
mistakes that are being made, offer an amnesty program to where
that if I--a not-for-profit yesterday in Atlanta, the woman is
a volunteer. She signed it, and she now realizes it is wrong.
Mr. FEENSTRA. Right.
Mr. GRAY. But now she doesn't have any guidance on how to
give it back.
Mr. FEENSTRA. Correct.
Mr. GRAY. So, when people want to come forward and say, ``I
made an honest mistake, I didn't know,'' allow an avenue to do
that.
On the 941-X, start today and say there is going to be
accountability to whoever is assisting and doing that clerical
work, who are you, sign it, what is your fee--or how are you
charging. But my point of it is, is that type of stuff is even
bigger than the guidance.
And then, finally, IRS doesn't have a permanent chief
counsel.
Mr. FEENSTRA. No.
Mr. GRAY. And that is who I look at and the taxpayer looks
at to get guidance. So, what do you expect?
And that is why I said in my testimony it starts at the
top. Who is in charge to make that appointment? And why take so
long? I don't need to know the answer. Just get it done.
Mr. FEENSTRA. And, Mr. Gray, you are exactly right. I mean,
frankly, it does start at the top, and it starts with the IRS.
It starts with putting the right people in place. Just like any
business. You have to answer, and you have to have customer
service, and this is not happening.
Mr. GRAY. Yeah. It may even go higher than that.
Mr. FEENSTRA. Yes.
Mr. GRAY. Because who appoints the chief counsel?
Mr. FEENSTRA. I get it. I hear what you are saying. Yes.
And why isn't that happening?
Mr. GRAY. It will help the IRS out. It will help the
taxpayer out, the small business out, and our rural
communities.
Mr. FEENSTRA. That is correct.
So, I have got another question. This is for Mr. Harris.
Mr. Harris, so I have a situation, a small business. It is
a family-owned business. And they employed some of their family
during this time. And we had multiple attempts by the owner, by
our office, to figure out if they qualified or not.
And, ultimately, the IRS cited the Work Opportunity Tax
Credit--and this is the quote--``conceptually designed to
prevent family members from taking advantage of wage subsidies
where there isn't a true employee relationship.''
But all these small businesses on Main Street Iowa, Main
Street USA, they employ family.
Mr. HARRIS. Exactly.
Mr. FEENSTRA. And this is my biggest problem.
So, my question to you, Mr. Harris, is do family-owned and
operated businesses--how do they get some of these dollars and
how can they provide documentation that proves that they are
not fraudulently collecting for the ERTC?
Mr. HARRIS. Well, I want to say go to a mill, because they
don't care. But that is not the correct answer.
It is a challenge. And we got guidance on that partly into
it. So, you had people who had already applied, and then we
found out that family members have this rule. And now we are
hearing that maybe they don't have this rule.
This is another example of where we need clear, permanent
guidance so that the people can rely on what they are doing,
because honestly--and Larry can speak up--I don't think they
qualify under the IRS rules today, but I don't know what it
will be tomorrow.
Mr. FEENSTRA. Right. But they just need clarity.
Mr. HARRIS. They need clarity.
Mr. FEENSTRA. Bottom line.
Mr. HARRIS. Because then you don't file.
Mr. FEENSTRA. They just need to know.
Mr. GRAY. If that is a hypothetical, they don't qualify.
Mr. FEENSTRA. Thank you.
I yield back.
Chairman SCHWEIKERT. Ms. DelBene.
Ms. DelBENE. Thank you, Mr. Chairman.
And thanks to all of you for being with us today. I
appreciate it.
I first wanted to share a quote from a restaurant owner in
my district about the impact of the ERTC on his business during
COVID.
Parker Sjolander, who owns a restaurant in Bellevue, stated
that his business, quote, ``relied on the ERTC to keep the
lights on and our workers on payroll. While ERTC refunds took
almost a year for many restaurant operators to receive, it was
incredibly important to help sustain operators during mandatory
shutdown orders and pandemic-related challenges,'' end quote.
So while the ERTC provided many small businesses with
necessary resources to keep their businesses running and
employees on payroll throughout the pandemic, we know that many
experienced significant delays and attempts to defraud them, as
has been discussed.
This is a clear example of why we need to make sure that
the IRS also has the resources to effectively combat potential
fraud and abuse and ensure timely processes of refunds. They
can't do it if they don't have people and resources.
I wanted to start with you, Mr. Harris. In your experience,
can you describe how fraudulent applications impact small
businesses that unknowingly worked with ERTC mills?
Mr. HARRIS. Well, it will eventually if they are subject to
an audit. It could ruin them. Because by the time the IRS comes
in and makes the determination that they weren't qualified,
this huge sum of money that is probably being infused back into
the business is no longer sitting in the checking account. And
yet the solution is you have to pay that back and most likely
with penalties and interest.
So, I mean, it could--the joy of getting the money could
very quickly be replaced with the terrifying reality that
because you weren't eligible, you could be put out of business
because of the amount of money you now owe back to the Federal
Government.
Mr. GRAY. If I might add to that. That example of that not-
for-profit person yesterday realizing she had been hooked,
crooked, whatever, and she wants to pay it back, don't let that
interest and penalty run. Have that amnesty. Have a process of
how to come clean.
The other thing, if she would have got that--if at the time
it was filed, if she had had to provide documentation on
qualifying on that 941-X, maybe the money would have never went
out and saved that business.
Ms. DelBENE. Thank you.
Mr. GRAY. Thank you.
Ms. DelBENE. Thank you.
Ms. Czipo, can you describe how additional resources for
ERTC education and outreach would have helped nonprofits and
small businesses that were seeking relief?
Ms. CZIPO. Sure. I mean, the first thing is they would be
aware of the program.
Secondly, we still hear from nonprofits that think that
because they got PPP, they are not eligible for the ERTC. Of
course, that was the case at the beginning, but then it was
changed.
Better, more clarity with respect to what those eligibility
requirements are, what it means to have reduction in gross
receipts, all of that, the more information they have at the
outset that is clear, then they are more equipped to apply and
get the relief that they need sooner.
There is no question that education is absolutely key to
this process, and it will help to stave off all of the bad
actors that we have been talking about.
Ms. DelBENE. And just to follow up on that, does the IRS'
focus on increased ERTC auditing disproportionately impact some
businesses, like disadvantaged or minority-owned small
businesses?
Ms. CZIPO. It could. I mean, part of the issue is there are
some organizations that, because of the complexity, were
perhaps shut out of the process or less inclined to apply
because they didn't have the resources to hire a reputable
accountant, or they just didn't have the bandwidth to look into
the complexity of the rules.
And, of course, the fear of an IRS audit or there are
certain organizations that may deal with constituencies that
may be a little bit more reluctant to apply.
So, again, it goes back to making sure that there is good
education and that the program is structured so that maximum
access is allowed for organizations at the grassroots, at the
rural level, organizations serving marginalized constituencies,
and a lot of other folks that might be shut out.
Ms. DelBENE. Thank you.
Thank you, Mr. Chairman. I yield back.
Chairman SCHWEIKERT. Mr. Fitzpatrick.
Mr. FITZPATRICK. Thank you, Mr. Chairman. I want to thank
the chairman for holding this hearing.
The volume of casework that my office has received on ERTC
issues since January alone has been mind-boggling. The
inquiries my office submitted were on behalf of a whole host, a
range of organizations, including veterans organizations, small
businesses, senior homes, just to name a few.
And one of my constituents was owed almost $300,000 and
needed it immediately in order to keep their business doors
open. Another constituent had difficulty getting the IRS to
even confirm that they had received their application.
Lastly, my office received--this is one instance--a
complaint from a constituent who had applied for ERTC for the
years 2020 and 2021 but never even received a credit until the
end of 2022.
Most small businesses do not have the luxury of time when
it comes to these issues.
As you all know, the ERTC touches just about every sector
of our businesses and our local economies, and there are dozens
more stories like the ones I just referenced in districts
across America.
Our small business owners deserve better. They deserve
better customer care and better service from the IRS.
I will start just with you, Mr. Gray. If you could
describe, specific to your experiences, in communicating with
the IRS over ERTC claims.
Mr. GRAY. Okay. In communicating with them, I have, like
Roger, an unusual opportunity as a small practitioner that I
get to come to D.C., and it was virtual.
The communication, it is open. We communicate through the
national public liaison. I work with local liaisons. You can
work with the Taxpayer Advocate.
I think one of the things that is missed by the small
preparer in the small communities is that the Taxpayer Advocate
actually will assist the tax professional. But they are being
overrun with requests.
So, I think, one, there was not enough communication. There
was not enough guidance. Some of us at the table have been
asking for what we call the soft letter to get out there for a
couple of years. FAQs communication are not being updated.
A real quick example. There was a memo from counsel on the
supply chain. I used that yesterday to convert a person that
was going to get a million dollars. That one communication
stopped a million dollars going out that, as Roger referred to,
when the IRS would show up for an audit, could put them out of
business.
But more communications, more channels, more outreach. But
until they get guidance, until the IRS communications,
liaisons, until they get guidance, they can't put it out. So,
if it doesn't exist, there is no communication, no matter how
many times we have a conversation.
Mr. FITZPATRICK. And I will leave it to the rest of you on
the panel. Any feedback you have for us regarding specifically
what the IRS can be doing differently when it comes to their
ERTC challenges, in terms of the structure of the IRS, the
manpower at the IRS, the resource allocation?
Mr. CLEARY. Well, the big thing, and you hear it a lot
today--and I am sorry Ms. DelBene left. I was going to
volunteer her, given her technology background. They need
technology.
I mean, we mail stuff. Our members mail stuff, and they fax
stuff. And when we come and talk to your young staffs about the
problems we have, we have to tell them what a fax machine is
first and then go from there.
So, they are using fax machines and mail and not email. I
mean, that is just a first shot out of the box, I think, to
improve technology.
Mr. HARRIS. And I would agree with that. As Larry
mentioned, we are fortunate that at our level that we can have
one-on-one discussions with people here in Washington. But I
think it is impossible for a small business owner to pick up
the phone and call the IRS and find the status of their claim,
because it wasn't a priority.
We have to put technology in place and understand that when
people send things in, they expect them to be logged somewhere
and a status report being available.
So, technology is a huge part of what the IRS needs to
embrace and use it to improve customer service, not just their
own ability to do certain things better.
Ms. CZIPO. I would just also add that people power matters
too. Certainly the IRS has an exempt organization office that
in some cases, when it has been better staffed, was a godsend,
to just be able to help, talk to a human being, ask questions
about guidance.
And in this particular circumstance, when you have such a
complex web of rules and regulations, having somebody to talk
to about your own situation--the FAQs absolutely--but having a
human being also helps too.
Mr. FITZPATRICK. Okay. My time has expired. But I want to
thank you all for your time today. Thanks for being here.
I yield back.
Chairman SCHWEIKERT. Thank you, Mr. Fitzpatrick.
Ms. Moore.
Ms. MOORE. Thank you so much, Mr. Chairman.
I just want to thank this panel for the master class. And I
forgot who said it, but when you spend this much money in the
middle of a pandemic and you must push the money out very fast,
the fraudsters just show up. They are just there.
And I also appreciate the fact that you talked about, I
mean, the IRS was also one of the agencies where people weren't
at work. I mean, people were sending in mail to empty desks.
With that being said, I just can't resist mentioning that
the request for $80 million to add to the IRS, this is a
perfect reason why we ought to do it. Because the Employee
Retention Credit is not the only kind of fraud we have to deal
with the IRS. We also have to deal with the fraud of people who
know that their tax returns are so complicated, so complex,
that they can't be caught and won't be audited because we don't
have those resources, notwithstanding the fact that you
mentioned the technology. I mean, I have been on the phone with
the IRS and able to cook an entire chicken dinner meal while I
wait on the phone.
I am happy to know that the IRS, they have seen more than
2.5 million claims since the program was enacted, and that they
have caught up with the backlog. As of the week ending July 24,
more than 99 percent of the cases are current, meaning that
they are 3 months old or less. And they are seeing--doing
70,000 claims each week.
I did meet some of the mills. They came right into my
office this week. And I shared with them that I was unhappy
that they were in operation. And so I think they left my office
willingly.
I just want to say while I have the mike that it is
heartbreaking to know that we are still working to get people
their money, many small businesses, and to think about how
eager we were to claw back money in healthcare and money that
children needed and the rescissions that we made, and we did
not even think twice about lending more time to those programs.
So I am happy to know that there are 500 ERC-trained
examiners and auditors, and so we are looking forward to them
catching up.
I would like to yield time to my CPA's son. And that is
child abuse, by the way, to make them work.
Mr. SCHNEIDER. I will tell stories.
Let me just ask real quick questions, because I think we
are wrapping up.
Raise your hand if you think more effective compliance by
the IRS would lead to less fraud?
Okay. Just to make it easy, everyone raised their hand.
Raise your hand--and I think we have heard this today--if
we had greater capacity to process returns at the IRS, that
would be a good thing.
Everyone agrees, so it is unanimity.
And capacity is really a function of having people with
training and technology tools so that we should be investing in
our people and our technology. Raise your hands if you think
that is a good idea.
So this is a setup. Does anyone want to raise your hands to
say it is a good idea that we take money away from the IRS?
I don't see any hands raised. I think the point being is we
in the last Congress made sure that the IRS was getting the
funds to begin the process of bringing on more people with the
skills to do their work more efficiently and give them the
technology tools to do so.
I hope that we can take from this hearing the lessons that
it is time for us to work together, Republicans and Democrats,
to make sure that the IRS is serving the American people,
giving them the guidance and information they need to file
timely, giving their advisers, like you on this panel, the
information you need to give the advice to your clients to file
timely, and having the technology in place that we can process
those returns, get the refunds to our citizens, and make sure
that we have the best, most efficient, most capable IRS
possible.
I yield back.
Mr. CLEARY. Mr. Schneider, if I may, after that setup,
because it was brilliant. It really was good.
I spent 10 years in the Federal Government in the executive
branch, and nobody ever has enough resources, ever. And so, you
have to triage. You have to. And you have to prioritize. In
this case, again, when the Commissioner put a surge staffing on
this, the numbers started going down.
So, our request today is keep that surge in place until
that number is zero.
Mr. SCHNEIDER. I will share that with the Commissioner
because I agree with you.
I yield.
Chairman SCHWEIKERT. You yield to Ms. Moore.
Ms. Moore----
Mr. SCHNEIDER. I yield to Ms. Moore. Thank you.
Ms. MOORE. I have to yield back. I did know that.
Chairman SCHWEIKERT. No. I just--and thank you for--you
have actually tolerated a couple of our hearings today, and I
really appreciate you.
Ms. MOORE. I am so hot and so tired. If I could make it on
August 1, I would do it.
Chairman SCHWEIKERT. I am just upset you have never invited
any of us to your chicken dinner.
Ms. MOORE. Listen, just hook up with one of my grandkids,
they will get you there.
Chairman SCHWEIKERT. All right.
Panel, a handful of things I want to get my head around,
and there is actually a reason I waited till the end.
First off, I have one thing here. It says the IRS considers
6 months within the window of still being timely. I had someone
say 3 months.
Do any of you know what the IRS' running definition is of
something that is still timely?
No? And that may go back to Mr. Gray's comments of some of
the things, that we just desperately are hungry for
information.
Mr. GRAY. Right. And the other thing to think about, as we
move technology--as the IRS moves through better technology,
the other thing is the IRS a lot of times has got to think non-
paper, because a lot of times they will take a new technology,
but they keep the old process. And sometimes that is not the
most efficient.
Chairman SCHWEIKERT. That is fair. But look--I have no idea
what is beeping over there.
Look, there is a number of us, and since my time on the
Ways and Means Committee, we are trying to get the IRS off of
its own servers, off of its own storage. If the Department of
Defense can use an encrypted world out there, the IRS can too.
I will give them one credit. It is not a non sequitur. They
actually did a small experiment with a ChatGPT type model of
call-ins, and it worked. And there is a model actually here of
instead of an army of human beings to actually be picking up
the phone, sometimes you need someone who will stay on the
phone with you for 45 minutes to help you fill out the forms.
Turns out that they had a really good, positive experience with
that limited experiment.
And so, for many of us, the constant debate here is
sometimes it is: What is resources? Is it the next-generation
technology to do it better, faster, and to mine data to find
bad actors? Or is it an army of people that functionally become
very expensive when I have to figure out how to finance the
pensions and healthcare and those other things? It is just the
reality of my world.
But there is a handful of things I really want to get my
head around.
Okay. Right now, let's actually say how many--what is your
estimate of how many of these ERTC claims are still to be
processed? What is, from your expertise, what is out there?
Mr. CLEARY. Well, the IRS would say about 500,000. But,
again, remember the 250 that are PEO claims represent
probably--I mean, I wouldn't even guess--but tens or maybe a
hundred thousand additional claims.
Chairman SCHWEIKERT. Okay. So, 500 plus 100?
Mr. CLEARY. Yeah, ballpark. That would be a good ballpark
number.
Chairman SCHWEIKERT. So, 600.
Gentlemen, would you all agree that there may be 600,000
out there.
Mr. HARRIS. I think that probably is the right number. The
Commissioner in his meeting in Atlanta--and I can't remember
what day.
Mr. GRAY. The day before yesterday.
Mr. HARRIS. The day before yesterday also said that
typically when programs like this are created, that you see
this arcing down of claims, and yet they are not seeing that,
and they are attributing that to the mill.
So, I think the wildcard in this is how much of this
fraudulent activity is causing these numbers to stay inflated
when naturally these programs at this point in time would have
been declining.
Chairman SCHWEIKERT. Gentlemen, if there was a technology,
what could we do--I have heard the discussion of grabbing one
of the proper forms and requiring that, some gross receipts on
part of the app.
What would be the fastest way to quickly shut down the bad
actors?
Mr. GRAY. First, do an amnesty, because there are people
out there wanting to pay it back.
But here is what happened----
Chairman SCHWEIKERT. We are going to get to the amnesty.
Mr. GRAY. Okay. Well, in the deal, make a deal with that
small business to say help us find more of them. Because in
this you are going to get a lot more bang for your buck if you
can get some cooperation from the LLP, so they can start
finding the bad actors and have a way to take action against
them. Because there is a due process and the bad actors are
going to lawyer up, and it could be 10 years from now.
Chairman SCHWEIKERT. Well, that is sort of the second part.
But, Mr. Harris, if I had to stop for those folks who were
getting solicited today who have not filed, what could the IRS
do almost immediately in rules, requests, and RFQs, those sorts
of things, to stop bad actors?
Mr. HARRIS. Yeah. They are obviously losing the PR battle
in the marketplace. That is hard for them to win. They don't
turn to IRS, small businesses, first for information.
I think you are going to have to empower the community that
Larry and I work in. That is where the businesses are coming to
when they are getting solicited.
And it is hard to say this, but enforcement is ultimately
what slows down the cheaters, the fear of getting caught. And
right now, there is not a great fear.
I think the system is being overwhelmed by the bad actors
to the point that everybody thinks they can take a chance
because the chances of getting caught are nothing. And that has
to be changed somehow.
Mr. GRAY. Right now, it is a business decision, not a
compliance decision.
Mr. CLEARY. Yeah, I agree with that. And, again, it seems
oversimplistic, but if you clear out the backlog, the mills are
going to dry up.
Ms. CZIPO. And there is also the issue of penalties, just
making sure that there are--right now there are not a lot of
disincentives for the scammers that are out there. So upping
the penalties.
I don't know, I am not an attorney, so I don't know if it
is possible to put guardrails around the payment structures,
the exorbitant loans, the exorbitant contingencies, all of
that.
So those are just some of the things that I would add to
the mix.
Chairman SCHWEIKERT. Interesting. Because as we were having
a discussion here, Mr. Pascrell and I were actually trying to
discuss, oh, heaven, we may now actually have how many
thousands, tens of thousands of small businesses that answered
that call and now all of a sudden realize they have gotten a
check either dramatically more than they should have or
shouldn't have gotten one at all, they don't actually qualify.
How do you unwind it?
And, okay, so let's say you do an amnesty. We do a policy
set saying here is our amnesty. Is an amnesty where you credit
back the contingency fee they paid? Or if they prepaid, as we
have had some folks contact our office saying, ``Hey, I am
being asked to pre-pay a retainer fee.''
Any brilliant ideas on how you would unwind the number of
small businesses out there that have functionally been scammed,
but it is also the American taxpayers who have been scammed?
Mr. HARRIS. Right. We have all.
Yeah, I think you do have to recognize--and the Service has
said they are recognizing the fact that a large percentage of
the money they did not receive. So, we have to come up with
some way of acknowledging that money you didn't receive is
either paid back later, not paid back at all.
I think also you have to make this amnesty have a very firm
deadline to create an urgency to come forward and know that if
you don't come forward by a certain date, you lose this
benefit, to flush out what is in the system, if you will, by
creating an urgency to deal with it.
Chairman SCHWEIKERT. Okay.
Mr. HARRIS. But you have to deal with the fact that they
gave up 20 to 25 percent of that money and never saw it.
Mr. GRAY. And also, I think it is one of those look back,
lesson learned. I worked 20 years ago on a project for
voluntary compliance to switch for small business. I should be
paying wages, but I am not.
Well, what they did, the amnesty there was to say if we get
there--if you come and volunteer and you have been doing 1099s,
you can flip over to W-2 wages, and they literally almost
forgot most of that money.
But the point is first look at lessons learned to process.
When there was the offshore stuff, there was a way to come
forward, but it was through the soft letter.
So, again, I go back to if part--you could actually look at
paying this out faster as long as you had more of a--you are
getting the money, but you are also agreeing to this additional
compliance.
Chairman SCHWEIKERT. Okay. So, if we were to do,
immediately off the top of our heads, our checklist, we need a
whole bunch more rules checklist, so you could go on the
website and say, look, here are your compliance rules. Requests
that when filing for your forms that there is some tags on that
that actually have information that would be----
Mr. GRAY. Here would be a great one: documentation. A lot
of these mills are providing no documentation.
And so, if I am the mill and this is my small business
person that participates, if you send him a letter saying, ``Do
you have the following documentation?'' Roger is going to go,
``No.''
Well, if you don't believe you do, don't call the IRS. Go
to a trusted tax preparer. Because then there is opportunity.
Because there are a lot of people that have been innocently
getting this. I don't think the taxpayer--the small business
themself is not--for the most part, they are the innocent one.
Chairman SCHWEIKERT. We, obviously, have the concern of
awarding the bad actors.
Also, electronic portal. The form is electronic. You put it
in. You can immediately see it because it makes it dramatically
easier to track.
Mr. GRAY. Yeah. And see, right now the IRS has started the
online taxpayer account, but they haven't really stood up the
online business account.
So, there is where, if technology was set in there, then
any communication, that would help free up human resources
because they could be pushing this.
Where is this? We have received your application. We have
questions on the application. That could be pushed
electronically and tracked instead of, again, having these
paper files.
Chairman SCHWEIKERT. All right. What else would you add to
the checklist?
Mr. CLEARY. I mean, to me, all roads lead to technology.
Mr. GRAY. Yeah. But the documentation, the one yesterday,
the lady said, ``They didn't give me any documentation.'' So,
if I have no documentation, that is the first indicator.
If you have had to pay 15 to 30 percent, that is another
indicator.
So, I think, again, the communication--which they already
have systems set up to do that. That communication to everybody
that got one of these credits, both in the past and in the
future, but in the future to clip it off and stop it is to say
send certain--have a checklist. Do you have this kind of
documentation? Here is what we are going to be looking for in
an audit.
And the fear of the audit will have more impact than the
audit because the IRS does not have the resources to audit out
of this.
Chairman SCHWEIKERT. With some of this there are some
mechanisms to do the audit electronically or through data
mining.
Mr. GRAY. Yes.
Chairman SCHWEIKERT. But you are absolutely correct. And I
fear--I despise the concept that the fraudsters get away with
this and the small businesses actually end up in the position
of being punished.
Mr. GRAY. One of the--when I was doing these YouTubes and
shopping the market, so to speak, to find out the bottom line,
was one of them said, ``Well, IRS is not auditing.''
``Is your income under 400,000?''
You know where they are going? I am getting a double free
pass.
This is getting--this is much bigger than the issue on the
table today. Downstream compliance, there is going to be so
many--what about the income tax amended return? Right now, with
what OPR issued in March, I, as a CPA, if I first have to
determine if Roger went to somebody else to do the 941-X, Roger
says, ``Larry, I would like for you to do my return,'' and I
either don't understand the rules or I have advised him not to
do it, I cannot help to get up to a third of that money back in
the Treasury from the income tax adjustment.
So, I am now saying best client, the one that I referred to
earlier in southern Illinois, it was the fact that she lost her
best client because she said that--so there is more to this
than just the credit. It is impacting downstream compliance for
years to come.
Chairman SCHWEIKERT. Okay. I am going to do something a
little awkward because I still have one or two more things I
want to touch on. But Ms. Malliotakis was kind enough to come
back and spend some time with us.
Your 5 minutes.
Ms. MALLIOTAKIS. I feel like I am seeing you too much
today. We started the day----
Chairman SCHWEIKERT. Yes, I get that a lot from my spouse.
Ms. MALLIOTAKIS [continuing]. A lot of hearings today.
Well, thank you. Thank you all for coming today. And I
appreciate and have the opportunity to read the testimony.
While the ERTC's intent to support these struggling
businesses during what was a challenging time is commendable,
the lack of sufficient guidance and regular updates from the
IRS has led to uncertainty and vulnerability for small
businesses to be exploited by fraudsters and predatory
practices of scammers. And I know that you touched on this.
Lack of clarity in the IRS guidance has led to confusion,
left many small businesses in the dark. They are unsure of how
to properly assess their eligibility or navigate the
complexities of claiming the credit.
Lack of communication and status updates from the IRS adds
another layer of uncertainty for small businesses. Businesses
are relying on outdated information, leading to inadvertent
errors in their claims or even missed opportunities to access
the support that they desperately need.
The absence of a clear procedure to correct unintentionally
inaccurate claims exacerbates the situation. Small business
owners who make genuine mistakes in their ERTC claims face the
risk of penalties and additional burdensome paperwork. And this
discourages some of our entrepreneurs from even attempting to
claim the credit, fearful of potential repercussions of
unintended errors.
Regrettably, the combination of insufficient guidance, lack
of updates, and unclear procedures has created an environment
ripe for fraudsters to exploit these vulnerable small
businesses.
And as a legitimate business struggles to understand the
intricacies of the credit, bad actors may take advantage of the
confusion, leading to false claims, misuse of funds, and
fraudulent activities.
This not only diverts critical resources away from those
who genuinely need them, but also undermines the integrity of
the ERTC program as a whole.
In light of these changes, the IRS must take immediate
action to address these issues, providing clearer, more
comprehensive guidance on ERTC eligibility. And clean
procedures, as well as regular updates, are imperative to
ensure that small businesses can access the support that they
deserve and that they are warned that there are these
fraudsters out there.
Equally as important is the establishment of a transparent
and efficient process for correcting unintentionally inaccurate
claims.
The ERTC's effectiveness in aiding businesses that
struggled through the pandemic depends on the IRS' commitment
to providing sufficient guidance and regular updates.
Without addressing these issues promptly, we risk
perpetuating uncertainty and leaving these small businesses
vulnerable to the exploitation by fraudsters.
So, I will start with Mr. Gray.
I am extremely concerned about the small businesses in my
district that were misadvised by aggressive ERC promoters and
improperly claimed the credit. It seems like those businesses
may get hit with a double financial whammy. The business is
going to have to pay the IRS back on the improper claims; and
then, second, those businesses may not be able to recoup the
fee, which was probably substantial, that they paid to the ERC
promoter.
Can professional tax practitioners, like CPAs, help
businesses now that unintentionally claimed an unsubstantiated
ERC, or is it too late? What would you advise?
Mr. GRAY. Well, the first thing is what I just referred to
a couple of minutes ago. This notice from the Office of
Professional Responsibility, I have to comply with that. The
fraudster doesn't have to. And in that statement, it says that
if I assist an income employment or excise tax in order to
assist, I have to be knowledgeable of the ERC.
And ERC is a payroll question, and a lot of practitioners,
especially small practitioners, may not do payroll tax, so they
are not aware of the rules. But yet they are coming forward and
saying, ``I need help with the 1040 tax return.''
Based on that rule, if I follow the guidance, my answer is,
``I can't help you.'' And that is a sad day, because I
ethically, through my standards, through AICPA, my standards
are that I am to help get people right. So, if somebody comes--
because what is it, Roger? It says if we do that, we might be--
--
Mr. HARRIS. Perpetuating the claim.
Mr. GRAY [continuing]. Perpetuating the claim, if we are
helping to put money in the Treasury.
The other thing would be to be able to get the guidance. In
April, I think it was, that they had within the IRS an audit
and CI, they were going to get a team together and do
something.
Roger, have you heard back from that?
Mr. HARRIS. Not yet.
Mr. GRAY. Me neither.
So back to how many months. We continuously ask at the
table, let us--include us not in the communication out, but we
will work with you working on the project to help solve the
problem systemically.
So, I think letting practitioner groups, associations,
payroll, income tax, all the organizations, we have offered to
help. Please take our offer because then we can work to answer
your question much better.
Ms. MALLIOTAKIS. Yeah. Just one more question, if the
chairman allows. Now that he is busy, let me ask.
The IRS is going to find clear instances of fraud, but also
probably going to find cases where a well-intentioned business
or nonprofit was misled by an ERC credit mill into taking a
larger credit than they were eligible for or cases where the
ERC mill has produced large volumes through baseless--though
baseless report on why a small business or nonprofit qualified
for the ERC.
How at all do you anticipate the IRS will distinguish these
different cases? I mean, do you think the IRS has the resources
to be able to distinguish between clear cases of fraud and
cases that aren't so clear?
I guess your last answer kind of said, if they couldn't get
you this information, it has been months, I imagine that will
be----
Mr. GRAY. Roger, I will follow you.
Mr. HARRIS. They are not going to be perfect in it because
it is one of these facts and circumstances cases.
They do that somewhat routinely in terms of allowing
deductions, charging fraud versus things. But it is not going
to be perfect.
I think what we have to ensure is that if a taxpayer, a
small business owner, believes that they have been found
improperly, that they have the proper process for appealing
that because it is going to be left up to a facts and
circumstance in an individual case.
Mr. GRAY. And that is why there has to be a due process so
that--because if that taxpayer on the first contact has no
representation, like myself, then they should be able to have,
``Hey, can we appeal this, or can I talk to a manager?'' That
process is in place on examination.
But, again, I think the sooner there is inclusion of
practitioner groups more involved in setting up the way to go.
See, if we could go back three and a half years, normally
you would have seen an ERC implementation team. And the reason
why that didn't happen is because the pandemic was going on,
they were working at home. So, it wasn't like they had all the
resources.
But it is never too late, as the chairman said, to snip it,
and we are here to work with the IRS to snip it.
Ms. MALLIOTAKIS. Thank you.
Chairman SCHWEIKERT. Thank you, Ms. Malliotakis.
And as being someone who is about to run to the airplane.
Mr. GRAY. Don't get in front of me.
Chairman SCHWEIKERT. Thank you for being here today.
I am going to request something from all of you and anyone
that is out there listening. This is something we are going to
have to try to persuade the IRS, and with our--through memos or
whatever, we need a solution. You brought something to us that
I am not sure I was completely mentally prepared, is how do we
unwind the charities, the small businesses that have
functionally been scammed?
Mr. GRAY. And, again, I am going to say, we have an
opportunity. We have got a new Commissioner. There is no blame.
Chairman SCHWEIKERT. But the scale of it is my great
concern, is I don't know if I had enough practitioners to
actually unwind the scale. So, some of this may be guidance.
How do I use technology? How do I automate? How do I do it
quickly? And how do I stop the hemorrhaging?
So please send us ideas.
And the last thing they always have me read is, please be
advised that members have 2 weeks to submit written questions
to be answered later in writing. Those questions and your
answers will be made part of the formal hearing record.
And with that, please send us your ideas.
And thank you for staff. You have been very patient in
helping put this together and everything is appreciated.
And with that, let's all run to the airport.
[Whereupon, at 4:11 p.m., the subcommittee was adjourned.]
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