Bogus ‘tax service specialists’ duped business owners in latest Covid relief debacle, IRS says

When the pandemic upended daily life in his small Missouri town, small-business owner Scott Volner went into overdrive to keep his employees on the payroll, despite a drop in revenue.

Then he started to get bombarded by telemarketers who were claiming to be “tax service specialists,” telling him he qualified for a special IRS pandemic relief credit. Among hundreds of calls and emails, he signed up with a company and agreed to pay a 10% fee. He ended up with a check for $330,000 — money he plowed back into his business.

“They are promoting it, and they have the service to put the whole package together for you so you don’t have to fill out the forms,” said Volner, who runs a fertilizer business in Rolla, Missouri.

But it turned out Volner wasn’t eligible for what’s known as the Employee Retention Tax Credit, or ERC, which has very specific and narrow criteria. For one, the credit is available only to business owners based in states where there were mandatory shutdowns.

Now Volner has to figure out how to pay back money he has already spent.

“It’s going to be a long, hard road to tow to get this all paid back,” said Volner, who had used a company called ERC Specialists, which didn’t respond to requests for comment.

A screengrab showing Scott Volner. (NBC News)

Volner is among tens of thousands of people caught up in the latest pandemic relief debacle — one the IRS acknowledges is costing taxpayers hundreds of billions more than it should have.

Congress said the Employee Retention Tax Credit would cost around $55 billion, but new estimates put the cost at $250 billion, and claims are still pouring in.

IRS officials say the program has been a magnet for unscrupulous promoters who took as much as a third of each payout while filing what the IRS commissioner calls “a tsunami of bad claims” on behalf of businesses who never qualified. They say there also has also been a significant amount of outright fraud by people who lied on their applications.

“The problem is we have promoters out there who are trying to put one over on small businesses, convincing them they’re eligible for something that they’re not eligible for,” IRS Commissioner Danny Werfel said in an interview. “We have significant concern that promoters and marketers are trying to essentially trick small businesses.”

It’s not just promoters and marketers who have sought to deceive the government. A convicted murderer in a California prison is accused of orchestrating a scheme using ERC claims to steal more than a million dollars, some of which he used to throw a party at a $9,000-a-night Las Vegas penthouse and then fly his relatives home on a private jet, according to court documents.

Werfel said the IRS has found tens of thousands of claims for businesses that either never existed or didn’t have employees during the pandemic.

“There are ways in which you can, unfortunately, trick the IRS,” he acknowledged.

The ERC joins a list of pandemic relief programs that have been plundered by fraudsters, with losses reaching as much as $280 billion, or enough to fund the FBI’s annual budget for 25 years. And there aren’t enough FBI and other criminal investigators to catch even 1% of the fraudsters, experts say.

The Justice Department last week announced it had charged around 3,500 people and seized $1.4 billion in stolen Covid-19 relief funds — a tiny fraction of the estimated fraud.

Werfel, who wasn’t the IRS commissioner when Congress designed the program, described a dynamic that was present in all pandemic relief programs — a desire to get the money out quickly, leading to decreased scrutiny of claims.

“When you have an acute situation like a pandemic and emergency, you’re always balancing ‘let’s get funds to people that need it quickly’ versus asking for a bunch of extra paperwork and a bunch of extra proof,” he said. “There are certainly things we need to learn and do better in the future for the next crisis or the next emergency.”

The IRS is scrambling to stop the bleeding and to claw back what it can.

The agency suspended the processing of ERC claims and says it has launched thousands of audits and at least 400 criminal investigations to go after ineligibility and fraud. It’s also focusing on promoters, six of which have been charged criminally, according to the IRS.

So far, the larger promoters who blanketed TikTok with ads haven’t faced charges. Some of those companies raised awareness of the tax credit by featuring celebrities, including Kevin O’Leary of “Shark Tank” and Ty Burrell, who played dad Phil Dunphy on ABC’s “Modern Family.”

Neither could be reached for comment.

“I’m upset — it’s frustrating and it’s aggravating on multiple levels, because the marketing firms had too much power to be involved in this,” said Michelle Hance, who runs a small audio/visual business in Missouri.

She signed up to get the tax credit with Innovation Refunds, and she says she received $13,000 from the federal government, which she recently had to pay back. She said she paid the promoter 25% of the money the IRS paid her, and she now feels misled because it’s now obvious to her that she never qualified.

“The promoters got rich,” Werfel told NBC News. “And then you turn around, if you’re the taxpayer, and you say, ‘Promoter, you said no risk,’ and the promoter is gone. They’re abandoning you.”

Over the last two months, Innovation Refunds has reported two rounds of layoffs at its Des Moines, Iowa, offices, according to state labor records.

A spokesperson for Innovation Refunds said by text message that it would issue clients refunds on the fee the company collected if it had told business owners they qualified for the ERC and the owners then found out from the IRS that they didn’t.

“Innovation Refunds is not a tax preparer,” the spokesperson wrote. “Independent tax professionals, to whom Innovation Refunds refers its customers, make ERC eligibility determinations for the businesses they serve. If that independent tax professional determines that money should be returned to the IRS, then we fully support that decision.”

The spokesperson said businesses can contact Innovation Refunds “via email” to get money back if they have discovered they are ineligible.

IRS scrutiny of ERC promoters will continue, Werfel said.

“We’re working with tax professionals that are helping alert us to the types of promoters out there that are driving these types of false claim activities,” he said. “We have criminal investigations underway related to about $3 billion in false claims.”

He said the IRS has recovered $500 million in bad claims and is urging Congress to pass legislation to extend the audit period. Without that, the IRS wouldn’t be able to scrutinize claims from 2020.

Congress is also considering legislation to repeal the ERC entirely, but it has stalled amid a lobbying campaign to keep it going. Innovations Refunds spent $720,000 lobbying Congress last year, according to Open Secrets, a website that publishes lobbying disclosure records.

That company told CNBC it had processed $7 billion in claims.

Larry Gray, a CPA in Rolla, Missouri, was among the early voices warning that ERC fraud could become a major problem. He took to YouTube from his office in 2020, sounding the alarm. He also helped Volner and Hance learn they didn’t qualify for the credit.

Gray says the responsibility for the mess spans the federal government.

“IRS bears a lot of responsibility,” he said. “Congress bears responsibility. Treasury should have got more guidance out.”

Early on, Gray said, he realized that anyone could easily defraud the program.

“You could put in a fraudulent federal ID number. You could put in fraudulent employees, send it in. … Because everybody’s focused on getting the money out, not seeing if they qualified to get the money.”

Soon, third-party promoters sprung up, marketing the tax break.

One of the heaviest advertisers was Miami-based Bottom Line Concepts, run by Josh Fox, who boasted online of millions in earnings for his clients, telling companies they were missing out if they didn’t apply for the credit. In a clip posted on TikTok, Fox told an interviewer that he was surprised by how few businesses and elected officials were aware of the tax credit.

“It’s amazing how many politicians we speak to who are unaware of the program and when we explain to them that their citizens, the people that own businesses in their town, can typically get hundreds of thousands and potentially millions of dollars back from the federal government,” he said.

Fox didn’t respond to multiple messages left at his office in Miami.

Many didn’t qualify. In fact, Gray said, the most common way businesses thought they did — if they were significantly affected by government-mandated shutdowns — didn’t apply in many red states where mandatory shutdowns were few and far between.

“It appears they didn’t go through the right test or ask the right questions,” Gray said.

But so far, when the IRS comes after a business that didn’t qualify, the promoters aren’t the ones on the hook — the businesses are.

Scott Volner used the $330,000 he got from the credit to keep employees on the payroll and expand his business, which recycles spent alkaline batteries into fertilizer by chemically extracting the zinc and manganese inside.

At the moment, he is trying to persuade the IRS to put him on a gradual repayment plan.

Volner said he hasn’t spoken to ERC Specialists since he learned he didn’t qualify for the tax credit because he didn’t think it would do any good.

“I feel betrayed, because I think I was sucked into it,” he said.

This article was originally published on NBCNews.com