How a ‘Well-Intentioned’ Tax Credit Became a Colossal Mess

Employee-retention credit has cost the government about four times as much as expected—and counting

By Richard Rubin of The WSJ. Excerpts:

"Expanded by Congress and publicized by a pop-up industry of advisers that helped employers claim the credit, the ERC spurred a wave of fraud that the Internal Revenue Service still struggles to control.

The ERC, examined nearly four years after its creation, is a classic case of good intentions and unintended consequences. Congress used the tax system to provide quick aid during a crisis—and the tax system opened the door to enormous problems."

"the seeds of problems existed from the beginning."

"Loose legislative language allowed a flood of claims, some encouraged by firms that charge fees to help employers apply. The IRS—prodded by employers and lawmakers—gave priority to pumping out money and didn’t pause the cash flow until it had determined that fraud was widespread. And employers, who say the credit was a lifeline in tough times, can still claim it for another 16 months. The ERC continues, long after other Covid-19 relief programs expired."

"In addition to the ERC, the law authorized direct payments to households; the Paycheck Protection Program, or PPP, for small employers; and a $600 weekly federal increase in unemployment benefits."

"Employers could claim the credit if they paid workers while the pandemic hurt their businesses. Instead of paying taxes that fund Social Security and Medicare, employers could keep the money up to the value of the credit. If employers realized after paying those taxes that they were eligible for the ERC, they could seek IRS refunds by amending their tax returns.

Lawmakers were happy enough with the program in 2020 and 2021 that they extended the end date, increased the maximum amount per worker, and let PPP recipients claim the ERC as long as each benefit covered different expenses."