The software was called “Tax Bandits”. The scheme, run from a prison in California, attempted to fraudulently claim more than half a billion dollars in tax refunds.
The method was well known: incorrect use of the employee retention tax credit.
The IRS said Friday that it is intensifying efforts to root out such frauds to protect taxpayers’ money, but acknowledged that the agency acted without intervention from Congress would continue to be inundated with potentially invalid claims.
One of the most brazen cases of alleged fraud in the program came to light in February, when federal agents filed charges against the ringleader of an operation led by Kristopher Thomas, a former gang member already in prison for murder. He was charged outside prison along with seven co-conspirators, including his mother, who helped carry out the plan, authorities said.
The joint investigation by the FBI and the Internal Revenue Service’s Criminal Investigation Division was called “Operation Fraud Street Mafia.” These were intercepted calls and text messages exchanging information about fake companies while using the money they earned to live a life of luxury – even flying on a private jet to a party in Las Vegas.
The alleged conspiracy is perhaps the most egregious example of the abuse of tax benefits created during the turmoil of the pandemic to keep companies and their workers afloat. Since its founding in 2020, a new industry of tax preparation firms has emerged dedicated exclusively to processing applications for the Employee Retention Tax Credit, which allows companies to collect up to $26,000 for each employee on payroll.
However, the program is rife with fraud, as many of these tax preparation companies trick businesses into claiming tax credits that they are not qualified to receive. As a result, the program cost the federal government more billions than originally estimated.
Taxpayers can continue to claim the tax credit through 2025, but the IRS paused the program last September so it could work through a backlog of claims and step up audits. Lawmakers in Congress have been negotiating tax legislation that would end the program early, potentially saving the federal government about $80 billion, but a deal has yet to be reached.
The IRS said Friday that it has protected more than $1 billion in federal tax revenue since it temporarily stopped accepting new applications for the credits last fall and gave taxpayers the opportunity to withdraw their claims. But the agency warned that the program remains a problem and that there are still about a million unprocessed applications.
“We remain deeply concerned about the widespread misuse of these claims, which has harmed small businesses,” Daniel Werfel, the IRS commissioner, said in a statement.
Wally Adeyemo, the deputy finance minister, called on lawmakers 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 combat fraud,” he said.
Since last September, 1,800 companies have withdrawn claims totaling $251 million. The IRS said it also caught 12,000 companies making more than 22,000 improper claims in the past six months, resulting in $572 million in penalties.
The seemingly unlimited amount of pandemic relief money prompted tax firms to launch an advertising campaign to convince companies to apply for the loans, earning them lucrative commissions.
In Mr. Thomas’s case, court documents showed that he and his employees filed about 300 payroll tax returns claiming more than $550 million in refunds, most of which were related to the Employee Retention Tax Credit.
Officials said the tax returns involved “fake companies, actual companies with inflated wages and employee numbers, and companies that no longer existed at the time the payroll tax returns were filed.” Much of the money claimed was not returned because the IRS suspected fraud.
The case showed a striking level of ruthlessness. Sometime in 2023, Mr. Thomas was caught talking to his mother on a recorded prison line about their fears that the federal government would find out what they were doing, officials said.
According to the complaint, Mr. Thomas downplayed those concerns and said they would likely be told, “You owe us this back and you have to pay it back when you can,” which occurred on “December 33.” of Neveruary” would be the case.
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2024-03-22 19:11:10
www.nytimes.com
