Case in point: the Employee Retention Tax Credit, a pandemic-era policy enacted to save jobs from the lockdown-induced recession. It has been co-opted by bad actors and morphed into a scam that has cost taxpayers more than quadruple what Congress anticipated. The Internal Revenue Service has repeatedly warned that the program is riddled with corruption. Yet it’s still on the books. In fact, IRS Commissioner Danny Werfel told a House Ways and Means Committee hearing Thursday that almost 20,000 more applications for the credit had arrived in the previous week.
The initial purpose of the program was sound enough when Congress created it at the height of economic uncertainty in 2020: to compensate businesses for keeping workers on their payrolls as long as they could, even as the pandemic hurt their revenue. The credit as initially designed covered about half of their wages from March 13, 2020, through Dec. 31 of that year. Then Congress extended the credit through December 2021, increased maximum payouts and made eligibility criteria more flexible. Expected to cost $55 billion when it was first enacted, the ERTC has so far cost $230 billion, according to the Congressional Budget Office.
People quickly figured out how to game the system. New claims flooded in during 2023 — and the Treasury started to hemorrhage cash. At times, Mr. Werfel said, new applications arrived at a rate of 70,000 per week, an extraordinary amount for supposed costs incurred during 2020 and 2021. Much of this surge was stimulated by companies running unscrupulous ads touting the program as an easy way to get rich. The companies offer to file claims on behalf of employers (in return for a cut of the IRS payout). The IRS saw that many claims were for companies that didn’t even exist during the pandemic or didn’t have employees. “We should see only a trickle of employee retention claims coming in. Instead we are seeing a tsunami,” Mr. Werfel said in September when the IRS issued a moratorium on processing this credit to weed out illegitimate claims.
The agency is still struggling with that task. Congress needs to end the Employee Retention Tax Credit immediately. Ideally, this would happen through Senate passage of a bipartisan tax bill that the House passed at the end of January by a vote of 357 to 70. It included a provision that would have made Jan. 31 the final day to apply for the ERTC instead of April 15, 2025, as current law stipulates. It would also stiffen the penalties on abusive promoters of the credit. The savings is an estimated $78 billion over the next five years.
The bipartisan tax bill redirects that money to more legitimate uses. The main one is helping low-income families with children by expanding the child tax credit. It also restores expiring business tax breaks of varying necessity, but such is the art of legislative compromise. Senate Republicans are threatening to block the bill largely for political reasons: They don’t want to give President Biden a perceived win in an election year. Their policy objection — that the bill lacks strict enough work requirements to qualify for the child tax credit — is hyperbolic. An eligible parent or guardian would have to have worked at some point in the two years before getting the credit.
If Senate Republicans simply refuse to stop blocking the bipartisan tax bill, Congress’s best alternative for eliminating the Employee Retention Tax Credit would be during the budget process in March. Lawmakers would be well advised to take advantage of it. In addition to the sheer outrageousness of the fraud, small businesses with legitimate claims can’t get theirs processed — because the bureaucratic pipeline is clogged with bogus ones. This program should not remain open for additional applications. The notion that the federal government has borrowed a penny — let alone the billions it actually has — to fund such an obvious taxpayer rip-off is unconscionable. Only one thing would be worse: failing to make it stop.
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