As Pandemic Aid Dries Up, Businesses Chase Covid Tax Credit

A temporary tax break for small businesses has spawned a cottage industry of advisory firms tapping into federal pandemic aid, raising alarms at the Internal Revenue Service that some claims are going beyond what the law allows.

The Paycheck Protection Program and other federal aid programs long ago shut their doors. But small businesses and nonprofits battered by Covid-19 can still use a lesser-known lifeline, the employee-retention tax credit, or ERC. Businesses can claim up to $26,000 per employee in refunds by amending payroll tax returns from 2020 and 2021.

An array of firms have popped up with the express goal of getting more businesses to file ERC claims. They are using radio spots, online ads and cold calls to compete with one another and with traditional accounting firms, payroll companies and tax credit specialists. The IRS has already paid out more than $58 billion in ERC claims.

Howard Makler, chief executive of Innovation Refunds, said his firm spends nearly $10 million monthly on marketing and it has completed more than 4,000 ERC filings totaling $1.35 billion. His business was focused on helping companies secure research and development tax credits when he learned about the ERC. “It was a larger opportunity,” he said. “We felt the ERC would be more valuable not only to ourselves, but to the companies that we serve.”

For small businesses that qualify, the ERC offers a welcome cash infusion as owners struggle with inflation, rising interest rates and tight labor markets. For those who stretch claims beyond the eligibility criteria, however, that move could be the first step toward a painful IRS audit.

The IRS had handled more than 450,000 claims through March and had up to 281,000 more to process as of early November. The agency says it views the ERC as a serious compliance issue; it has started audits, training 300 revenue agents on how to examine the credit. The IRS has sent some employers detailed requests for lists of employees and proof of eligibility, according to document requests viewed by The Wall Street Journal. IRS criminal investigators are looking into the claims.

The IRS issued an October warning to employers to be wary of advertising, saying some advisers are taking improper positions on ERC eligibility and size. In its statement, the agency warned that “improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.”

“It’s a bit of a gold rush,” said Gary Romano, president of Civitas Strategy, which has processed more than $125 million in ERC refunds for child-care providers. His consulting firm charges a flat fee—about $800 per ERC filing. Some ERC advisers collect 25% or more of the refund, industry participants say.

Paychex Inc., a payroll processor, said it has helped about 45,000 clients secure more than $9.2 billion in ERC claims.“There are many who just don’t understand that they are potentially eligible for this, and we’re slowly but surely contacting as many of them as is in our ability,” said Tom Hammond, a Paychex vice president. Paychex has said it charges a flat ERC fee averaging about $4,000.