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ABA Section of Taxation Meeting: IRS Starts Showing Tax Fraud Fruits of Pandemic Investigations

Posted on Feb. 16, 2023

The IRS Criminal Investigation division has started charging tax crimes related to the employee retention credit on top of the general financial crimes other pandemic fraudsters have committed.

Guy Ficco, CI’s deputy chief, recently told Tax Notes that as of January 31, the division has charged 10 or 11 ERC cases, and some have already reached sentencing.

The government charged the first case against a so-called ERC mill February 1, indicting Zachary Bassett and Mason Warr of Utah, along with their company, COS Accounting & Tax LLC, for tax conspiracy under 18 U.S.C. section 371, false tax return charges under section 7206(2), and wire fraud under 18 U.S.C. section 1343 for allegedly running an ERC claim mill.

ERC mills, which are advisory firms that aggressively advertise their services with promises of large tax refunds, have drawn concern from tax professionals and the IRS.

The IRS issued a warning in October 2022 to employers about third parties promoting the availability of the ERC that “often demand large upfront charges or fees that are contingent on the amount of the refund obtained by the employer.”

“Some may not inform employers that wage deductions claimed on their federal income tax returns must be reduced by the amount of the credit,” the IRS said.

According to the Justice Department, Bassett, Warr, and COS Accounting submitted over 1,000 fraudulent forms 7200 and 941 on behalf of clients claiming ERC and family leave credits worth around $11 million.

The indictment alleged that the defendants lied about the claimants’ eligibility, the number of employees, the amount of payroll, and whether there were any sick or family leave wages, all in an effort to fraudulently increase the size of the tax credits. The goal was to juice the credits, because the defendants would then reap greater fees.

The defendants allegedly courted single-member limited liability companies as potential clients to apply for the ERC and other COVID-19 pandemic relief benefits. They also advised independent contractors, including ride-share drivers, to form LLCs to claim the ERC and family leave credits, which the defendants generally managed to configure to come out to the maximum allowable amount.

The government alleged that Bassett, Warr, and COS Accounting often had their clients list spouses uninvolved in their businesses as employees to increase the credits.

Bassett, Warr, and COS Accounting allegedly engaged in the scheme from April 2020, shortly after the passage of the Coronavirus Aid, Relief, and Economic Security Act, which created the ERC, until August 2021. The indictment lists dozens of forms as overt acts of the conspiracy, lists 11 counts of aiding in the filing of false returns on behalf of the clients, and includes 13 wire fraud charges for fraudulent tax forms.

Promoters and Enablers

CI Chief Jim Lee has made clear that his division is looking at all sorts of pandemic-related fraud, with a particular interest in scheme promoters and enablers. The IRS’s ERC training materials also direct examiners to be on the lookout for abusive schemes sold to taxpayers by third parties.

Carissa Cuttrell of CI confirmed in a statement that as of February 14, the division has initiated 44 investigations into ERC fraud tied to the CARES Act, resulting in charges against 11 individuals. “Defendants in three of the charged cases have been sentenced; the remaining eight cases are ongoing,” she said.

Many of those other charges that have been made public involve specific business ERC claims, often combined with fraud committed against other pandemic programs like the Paycheck Protection Program.

The ERC was meant to help struggling businesses pay their employees during the pandemic by providing a refundable tax credit against employer taxes.

Initially, businesses that claimed loans under the PPP weren’t eligible for the credit, but the Consolidated Appropriations Act, 2021, made changes allowing even those businesses to qualify.

Timothy McCormally of the IRS Office of Professional Responsibility told Tax Notes at the February 10 American Bar Association Section of Taxation meeting that he has heard complaints from practitioners about ERC mills but wasn’t aware of any formal complaints submitted to his office.

The OPR is responsible for disciplining tax professionals who engage in misconduct. But for it to investigate concerns, those practitioners would have to submit a form to the office, McCormally said.

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