ERC Fraud Investigations Heat Up

Plus: IRS Free File Program Updates

Hi there,

It’s crazy to fathom, but it’s getting closer to holiday season and the end of 2023. How’s your tax planning looking? Here’s some inspiration for your business week.

This might go down as one of the most fraud-wrought tax programs Congress has ever deployed. Last week (Nov 2nd), the IRS presented a free webinar providing updates on the ERC program.

In a news release announcing the webinar, they stated publicly that they’ve uncovered more than $8B (yes BILLION with a B) in suspected ERC fraud, but a preview of other statistics by Jim Lee, deputy chief of Criminal Investigations with the IRS, have put that fraud number at $37B. Congress initially estimated the entire program would cost around $55B. It now has paid out $230B - if the $37B of projected fraud is accurate, that’s a 16% fraud rate.

The IRS has initiated investigations into over 300 ERC cases, with 15 currently charged, and four sentences with an average of 21 months of prison time.

There is also talk that the voluntarily withdrawal program (for those who haven’t received funds or received them and didn’t cash the check) might have a very tight window and only be available until January 2024. Anytime there is lots of free money up for grabs, there is going to be fraud. The unfortunate part is a lot of this could have been mitigated if the IRS had set out clearer guidelines around who was eligible for the credit.

The IRS recently announced it was rolling out a free-file program which would be an alternative for taxpayers instead of paying tax professionals or services like TurboTax and H&R Block. Unsurprisingly, Intuit is clapping back hard and has issued statements across dozens of publications stating that this system would hurt black taxpayers.

The research they're using to make this claim is the fact that the IRS audits black taxpayers 3-5x the rate of non-black taxpayers (primarily due to the Earned Income Tax Credit), but the author of the research has stated that taking her findings out of context when applied to a free-file system. The IRS has also stated that it’s reducing audits related to EITC claims to focus more of its efforts on higher-income earners.

Additionally, those who are more distrusting of the IRS believe it will lead to more taxpayers getting audited if they don’t agree with the numbers the IRS comes up with for your return in the free file program.

My position has always been that filing taxes should be as easy as possible if you want high rates of compliance. The reality is, most taxpayers would be well-served by a system that was free and allowed them to verify and file based on numbers the IRS already has. It’s not like this isn’t done in other countries either, it does with success. And, it’s not making preparing your own taxes illegal, it’s just giving taxpayers another option.

The Republicans are already trying to strip funding for this program, so whether it will ever come to full fruition or stays in test-mode with a small number of taxpayers remains to be seen.

3)Understanding Nexus.

dID yOu kNoW nEvaDa iS oNe oF tHe bEsT pLacEs tO cReAtE yOuR lLC beCaUsE tHeRe iS nO sTaTe iNcOmE tAx. I’ve seen plenty of business bros playing tax man make this claim online, but what they’re failing to understand is the principle of economic nexus.

Basically, the idea is you’re not taxed based on where you’re organized, but where you’re actually making the money. If I have an LLC in Oregon but am living in California, that income I made is going to be subject to California taxes, not Oregon taxes.

Here’s another example - in California, every corporation that’s organized OR doing business in California must pay the $800 Franchise Tax fee. Some states require you to pay taxes on all income earned, regardless of the source (you will get a credit in your home state if you pay taxes on that income in another state), while other states have a reciprocity agreement and don't require you to claim income in both states.

There are also situations as a W-2 employee where you can be taxed in the state where your employer is located even if you work remotely in a different state. The key here to keeping compliant and making sure you’re remitting taxes to the correct authorities mainly circles back to understanding how the specific state you are located in taxes income.

- Until Next Week,

Your Accountable Advisor