IRS ups efforts to squash fraud in tax credit program

WASHINGTON — The software was called Tax Bandits. The scheme, which was run out of a prison in California, federal officials said, attempted to fraudulently claim more than half a billion dollars in tax refunds.

The method was a familiar one: erroneous claims of the Employee Retention Tax Credit.

The IRS said on Friday that it was intensifying its efforts to root out such cases of fraud and attempted fraud as it tried to safeguard taxpayer money, but it acknowledged that without an intervention by Congress, the agency would continue to be flooded with potentially improper claims.

One of the most brazen cases connected to the program emerged in February, when federal agents announced charges against a man they called the ringleader of a fraud operation, Kristopher Thomas, a former gang member who was already serving prison time for murder. He was charged along with seven co-conspirators outside prison, including his mother, authorities said.

The joint investigation by the FBI and the criminal investigation unit of the IRS was called “Operation Fraud Street Mafia.” It involved intercepted calls and text messages exchanging information about fake businesses while using the money they made to live luxuriously — even flying on a private jet to a party in Las Vegas.

The alleged plot is perhaps the most egregious example of the abuse of a tax benefit that was created during the throes of the pandemic to keep businesses and their workers afloat. Since the program’s inception in 2020, a new industry of tax preparation firms has popped up just to process claims for the Employee Retention Tax Credit, which allows businesses to collect up to $26,000 for each employee on its payroll.

But the program has been rife with fraud, with many of the wrongdoers being tax prep firms luring businesses to apply for tax credits that they are not qualified to receive. As a result, the program has cost the federal government billions more than originally estimated.

Taxpayers can continue to apply for the tax credit through 2025, but the IRS paused the program last September

so that it could sift through a backlog of claims and step up audits. Lawmakers in Congress have been negotiating over tax legislation that would shut the program down early, potentially saving the federal government approximately $80 billion, but an agreement has yet to be reached.

The IRS said on Friday that since it temporarily stopped accepting new applications for the credits last fall and offered taxpayers the chance to withdraw their claims, it has protected more than $1 billion in federal tax revenue. However, the agency warned the program remains a problem and that it still had about 1 million unprocessed claims.

“We remain deeply concerned about widespread abuse involving these claims that have harmed small businesses,” Daniel Werfel, the IRS commissioner, said in a statement.

Wally Adeyemo, the deputy Treasury secretary, urged lawmakers on Friday to end the tax credit program.

“Congress must act to protect the interests of U.S. taxpayers and honest small businesses and give the IRS the tools it needs to tackle fraud,” he said.