Does the IRS deserve the heat it’s taking for its lead role in the disastrously expensive and fraud-ridden Employee Retention Credit (ERC) program?
You bet it does. And now legislation passed by the House effectively eliminates any additional ERC claims – a hard slap in the face to the taxpayers who routinely have a 3-year period in which to amend a return.
The IRS’s bumbling administration of the ERC program is shining a light on the remarkably poor state of the agency’s technology and processes. The aggressive criticism it’s taking from members of Congress and business owners is fully earned and owned.
That doesn’t mean the IRS is solely to blame for the ERC debacle – the same Congressmen crabbing about the IRS’s bad performance need to take a look at how slapdash and poorly thought out the originating ERC legislation was – but the IRS’s ineptitude has played a huge role in ballooning the ERC from its projected $55 billion cost to what could be as much as ten times that much.
No other significant federal program in recent memory has had anything like that magnitude of cost overruns. And the responsibility for it lies at the feet of the IRS.
The outlines of the story are well known by now: The COVID-panicked US Congress passes the CARES Act to “rescue” the economy in April of 2020 and creates the ERC to give financial help to businesses that retain their employees through the crisis even in the face of business impairment from the pandemic. The ERC cost is estimated at $55 billion, but through massive fraud, poorly written legislation, and even more poorly written IRS interpretations of the legislation, that number spins completely out of control.
The IRS blames villainous newly-founded firms whose sole purpose is to help other businesses submit ERC claims for flooding the system with far more applications for relief than it planned for – but the agency has apparently been paying out billions of dollars in ERC funds even though it has in its possession the very information that would alert them to the fraud and avoid paying out the claimed credit.
If someone at the IRS would match up pile A of previously filed tax returns with pile B of ERC applications, the likelihood of extensive fraud would be dramatically reduced. But the IRS appears not to have done that.
Did it occur to senior agency leaders that they should verify that businesses applying had actually paid the employment taxes they were now seeking refunds for? Apparently not. And so refunds – tens of billions of dollars worth – have apparently been paid to businesses that never employed anyone.
The agency that plays hardball with American taxpayers -- the one that issues elaborate multi-year records retention requirements, the one that’s getting $80 billion in new funding to hire more agents to audit and pursue additional tax dollars for the government’s coffers – can’t perform its own basic blocking and tackling. Its internal checks and balances are broken.
When the IRS fails to perform, as they did in this case, they claim victimhood. It was the “unscrupulous marketers that have scammed small business owners,” an IRS spokeswoman told The Wall Street Journal. But the IRS wrote its own interpretative language and forms for who was eligible for ERC credits and who wasn’t, and as the Journal also reported, “IRS forms provide its employees little insight into whether claims are valid. Employers aren’t required to provide basic information, such as why they qualify.”
It's a remarkable level of ineptitude – especially for an agency so quick to pounce on taxpayers who make errors or judgment calls someone at the IRS doesn’t like. Taxpayers get hit with stiff financial penalties for such mistakes. The penalty for the IRS, on the other hand, appears to be an increased budget.
As mentioned, Congress didn’t do its job right, either. Setting aside the question of the quality of leadership and legislative decision making around the COVID pandemic, Congress has developed a terrible habit of passing legislation that leaves tremendous amounts of interpretation up to federal bureaucrats. And nowhere does that bad habit affect Americans more directly and negatively than around tax legislation.
Hastily crafted, hastily passed, with a lack of objective standards and a surfeit of required bureaucratic interpretation, the ERC was a recipe for disaster from the start. But the fact that Congress then handed this toxic recipe to a perennially troubled agency like the IRS helped take the ERC program from just another datapoint to the egregious cost overrun hall of fame.
The IRS has been scrambling to get the egg off its face on this disaster, first declaring a moratorium on processing ERC applications, then trying to throw resources at the problem. But its administrative failures have put billions of dollars of taxpayer money into the hands of fraudsters while denying thousands of legitimate ERC applicants the timely processing of their justly-deserved refunds under the law.
The agency is deploying a rolling time roadblock that will inevitably push a large number of companies that have played by the rules right past their eligibility deadlines. And the grandees of the IRS won’t lose a wink of sleep over it. Their unilateral decisions smack of entrenched arrogance and a disregard for the taxpayers they’re supposed to be serving.
That $80 billion allocation Congress gave the agency last year is supposed to flow to new processing technology, too, in addition to those 20,000 new agents we hear so much about. The IRS said in a report to Congress last year that it would provide “world-class customer service” to taxpayers with the money. But the report itself was ripped by members of Congress as being vague and woefully short on details about how it planned to do that.
Of course it was. The IRS is a broken agency collecting taxes for an undisciplined Congress. That Congress oversaw a government that inflicted untold economic damage on American society as the pandemic unfolded, then tried to paper it over with overly-generous and poorly conceived tax cuts for businesses. And when it was time for the agency itself to perform on the administration of the ERC, it proved to be horrifically not up to the task.
There’s really no precedent for any cost overrun of this magnitude due to fraud and bad administration.
Nothing will change until American voters demand more of their government. But even after all this ineptitude and buck-passing, it’s not clear that voters are ready to demand change. This time, that apathy carries a half trillion dollar price tag.
