I.R.S. Stepping Up Efforts to Squash Fraud in Tax Credit Program

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The Employee Retention Tax Credit continues to be ripe for abuse as Congress mulls shutting the program down.

The software was called “Tax Bandits.” The scheme, which was run out of a prison in California, 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 I.R.S. said on Friday that it was intensifying its efforts to root out such cases of fraud as it tries 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 of alleged fraud in the program emerged in February, when the federal agents announced charges against the ringleader of an operation led by 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, who were helping to carry out the plan, authorities said.

The joint investigation by the F.B.I. and the criminal investigation unit of the Internal Revenue Service was called “Operation Fraud Street Mafia.” It involved intercepted calls and text messages exchanging information about fake businesses while using the money that 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 tax benefit that was created in during the throes of the pandemic to keep businesses and their workers afloat. Since its inception in 2020, a new industry of tax preparation firms have 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 payroll.

But the program has been rife with fraud, with many of those 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.

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