Concern over COVID-19 tax credits drives Wes Des Moines firm’s layoffs
- Innovation Refunds in West Des Moines will lay off about 40% of its workforce after an IRS moratorium on a tax credit program
- The program, which provides employers up to $26,000 per employee retained during the COVID-19 pandemic, is at the heart of Innovation Refunds’ business
- The IRS says it is responding to growing suspicions of fraud and abuse of the program by ‘unscrupulous actors’
A West Des Moines firm confirmed Friday it will lay off 78 workers as of Oct. 19 after the U.S. Internal Revenue Service placed a moratorium on a troubled tax credit program at the heart of the company’s business.
Innovation Refunds, 4350 Westown Parkway in West Des Moines, reported the planned layoffs on Iowa Workforce Development’s Worker Adjustment and Retraining Notification Act, or WARN, website. The law requires employers to give notice of mass layoffs at least 60 days in advance.
The layoffs dovetail with an announcement Sept. 14 by the IRS that it had placed a moratorium at least through the end of the year on processing new claims for the Employee Retention Credit program. Innovation Refunds helps employers use the credit to receive tax refunds for keeping workers on their payrolls during the COVID-19 pandemic.
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The moratorium comes amid a flood of improper and fraudulent Employee Retention Credit claims and to “protect small business owners from scams,” according to a Sept. 14 IRS news release.
Overall, Innovation Refunds, which also has an office in Miami, is laying off 155 people throughout the company, about 40% of its overall workforce, said Mireille Rosselli, its vice president of communications.
Rosselli confirmed that the layoffs are a direct result of the IRS moratorium. According to the Wall Street Journal, the still active though temporary program allows small businesses and nonprofits that suffered COVID-19-related losses to claim up to $26,000 in refunds per retained employee by amending payroll tax returns from 2020 and 2021.
The Journal in its November 2022 article quoted Howard Makler, a Miami entrepreneur and CEO of Innovation Refunds, as saying the company had handled more than 4,000 filings for the credits totaling $1.35 billion.
Company ‘indebted to the amazing staff we have in Des Moines’
The IRS announcement said suspension of the Employee Retention Credit program “follows growing concerns inside the tax agency, from tax professionals as well as media reports that a substantial share of new claims from the aging program are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing.”
The IRS told the Des Moines Register it cannot disclose who will be the subject of its audits.
Rosselli said Innovation Refunds has “always been in compliance with all of the rules.”
“To remain in compliance, we did not think it would be fair to take any new applications because it is possible the IRS will change some of the criteria, so we stopped our marketing and sales,” she said. “We did not want to submit applications that may end up being wrong if the criteria gets changed.”
For Innovation Refunds customers who already have applications in the system, the company will “absolutely provide audit protection” as the IRS begins checking the validity of claims, she said.
She said the company worked with tax professionals to determine if customers were legitimate businesses eligible for the benefit before filing any applications on their behalf.
“Unfortunately, with the IRS moratorium on filing new claims, we had to balance the business by making these layoffs and it has not been easy. We are indebted to the amazing staff we have in Des Moines,” Rosselli said. She added that it was the highly skilled talent pool available in the Des Moines metro, a major financial industry center, that drew the company to the area.
Rosselli said laid-off workers will receive pay and benefits for “an extended period of time,” and the company is in the process of establishing and putting money into a 501(c)(3) charitable fund to provide additional assistance for displaced employees if needed.
Though many companies handling claims for the Employee Retention Credit sprang up to take advantage of the program, she said Innovation Refunds existed before COVID-19, helping small and medium-size companies obtain research and development tax credits, and has helped about 26,000 small businesses nationwide.
“Small businesses employ about 90% of the workforce and are the backbone of our economy. Small business is near and dear to our heart,” she said.
IRS says small business owners ‘scammed by unscrupulous actors’
The IRS news release said the agency will continue to process existing Employee Retention Credit claims but that the 90-day processing period will be doubled because of increased scrutiny of potential fraud.
The IRS also is initiating audits of some claims and referring other cases to the Justice Department.
To date, IRS Criminal Investigation has uncovered suspected pandemic fraud totaling more than $8 billion, and as of July 31 had initiated 252 investigations involving over $2.8 billion of potentially fraudulent Employee Retention Credit claims. Of those, 15 of the 252 investigations have resulted in federal charges.
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Of the 15 federally charged cases, six so far have resulted in convictions and four have resulted in prison sentences, averaging 21 months, the IRS news release noted.
“The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in,” IRS Commissioner Danny Werfel said in the release. “The further we get from the pandemic, the further we see the good intentions of this important program abused. The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system. This harms all taxpayers, not just ERC applicants.”
