House lawmakers scrutinize pandemic-era small business tax break expert calls 'fraught with fraud'

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Scrutiny of a pandemic-era tax credit intensified this week as lawmakers, the IRS and tax professionals sought solutions for the wave of small businesses that wrongly claimed the tax break. The employee retention credit, or ERC, was enacted in 2020 to support small businesses affected by shutdowns during the Covid-19 pandemic and is worth thousands of dollars per employee. There's still time for eligible businesses to amend returns and claim credits, which has sparked a cottage industry of firms, known as "ERC mills," pushing the credit to businesses that may or may not qualify. "While it was a great opportunity and much-needed lifeline to small businesses, it is fraught with fraud," said Roger Harris, president of accounting and tax firm Padgett Advisors, speaking at a House Ways and Means Committee hearing Thursday. More from Personal Finance: IRS halts most unannounced visits to taxpayers IRS weighs guidance for employee retention tax credit How to know if your business qualifies for the employee retention tax credit "Any time this amount of money is being handed out through the tax system, the bad actors show up, and they have shown up in large numbers," he said. As of July 26, the IRS said, it had roughly 506,000 unprocessed Form 941-X amended payroll tax returns. As the IRS works through its backlog of unprocessed amended returns, it's unclear how many small businesses may have wrongly claimed the credit. But a future audit "could ruin them," according to Harris. The IRS has received more than 2.5 million ERC claims since the beginning of the program, but processing has slowed due to the "complexity of the amended returns," according to the agency.