Statement of Larry Gray, CPA, CGMA, House Ways and Means Oversight Subcommittee, July 27, 2023

Summary

Larry Gray, CPA, CGMA, a partner in a CPA firm in rural Missouri and Government Liaison for the National Association of Tax Professionals, testified on July 27, 2023 before the Ways and Means Subcommittee on Oversight at a hearing on the Employee Retention Tax Credit. Gray says 3rd-party ERC mills said businesses Gray knows do not qualify were eligible, and that their Service Agreements make the employer attest to eligibility; Jefferson Duke estimated a $182,000.00 refund. Gray says IRS.gov guidance refers to outdated Notices and that FAQs are historical. Gray quotes a solicitation offering accountants $12,500 per referral on a 20% fee, and calls for education, guidance and possibly legislation.

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                        Statement of Larry Gray, CPA, CGMA


Hearing on the Employee Retention Tax Credit Experience: Confusion, Delays, and Fraud


                       United States House of Representatives
                           Committee on Ways and Means
                             Subcommittee on Oversight


                                    July 27, 2023
                                      2:00 PM


                       1100 Longworth House Office Building
Chairman Schweikert, Ranking Member Pascrell, and members of the House Committee on
Ways and Means’ Subcommittee on Oversight, thank you for this opportunity to testify. I believe
the reason we are all here today is to see that the right amount of the Employee Retention
Credit (ERC) gets into the hands of eligible employers, as Congress intended.

My name is Larry Gray. I am a partner in a CPA firm in rural Missouri and am a small business
owner. I have been the Government Liaison for the National Association of Tax Professionals,
attending National Public Liaison meetings at the IRS in DC for over 20 years. Additionally, I am
an instructor on tax law, speaking nationwide.
While I still did local and state tax updates to my peers during the Pandemic, including Payroll
Protection Program (PPP) and ERC, because of the mandated Covid-19 shutdown, I could not go
on the road doing my normal national seminars, so I turned to YouTube to get the information
out. At first, it was PPP education, but approximately three years ago, it became more of a focus
on ERC.

The focus of my testimony today will be on being both a small business owner as well as a tax
professional, and the impact ERC fraud is having on small businesses and small tax firms in
America.

Through the end of 2020 when a small business could only get a PPP loan or an ERC, the
limitation on the ERC was $5,000 per employee per year. As a small business owner, I was not
bombarded with ERC specialists offering to file my ERC and get me thousands of dollars. Then
the rules changed.

Today we are dealing with aggressive and misleading ERC advertising in print, on the radio, and
on television. It is everywhere.
I have gone through the process of contacting a few of the solicitors and have spoken with some
of them on the phone. I have used actual information from one or more of my small businesses
that I know for certain does not qualify for ERC, however this is not what I am being told by the
3rd-party ERC mills I have communicated with.
In general, they do not ask the right questions, based on the eligibility requirements to qualify
as an eligible employer. Specifically, they ask nothing about any government mandated
shutdown in my area, and in all cases, they say my business qualifies for ERC.

The following are excerpts from Service Agreements I have received from these 3rd-party ERC
specialists.
Bottom Line Concepts
“By providing the information herein and signing below, Client acknowledges and attests that it
is eligible to claim the Employee Retention Credit...

Client is directing Bottom Line Concepts, LLC to claim the Employee Retention Tax Credit on its
behalf for qualified quarters during 2020-2021…as supplied by Client…”

ERC Specialists, LLC

“ERC Specialists, LLC DOES NOT provide any legal or accounting advice and users of this web
site should consult with their own lawyer and C.P.A. for legal and accounting advice.”

Jefferson Duke
Service Agreement “the client acknowledges they are a qualifying business entity to claim the
Employee Retention Credit (ERTC) according to the guidelines outlined by the United States
government.”

I called Jefferson Duke. Frank C went through their qualification checklist. (See attached Exhibit).
The following is their response:
“Estimated ERTC Refund $182,000.00
  Jefferson Duke Service Agreement

Dear Larry Gray,
…Upon our initial discussion it looks like you may be entitled to an estimated $182,000.00 ERTC
refund on the number of employees and qualifying factors we discussed over the phone…”


Notably, these 3rd-party specialists are clear in their Service Agreements that they are not
determining employer eligibility. By signing the Service Agreement, the employer is attesting
they are eligible.
However, as a practitioner who prepares income, employment, and other tax returns for clients,
I have a duty of due diligence to inquire of my clients with sufficient detail to ascertain the
information necessary to determine my clients’ eligibility for the ERC and to claim the proper
amount of the ERC on my clients’ returns.
With the complexity of the ERC and the aggressive marketing taking place, how many small
business owners are aware of the liability and potential consequences of signing these
Agreements and receiving this credit?
These employers are being told by ERC specialists that this is money they are entitled to.
Unfortunately, this has gone on long enough now that many small businesses, whether they are
an eligible employer or not, have received a large credit. Business owners converse, and if my
neighbor got the ERC, then I should also, is the sentiment I am hearing nearly every day in my
office.
The taxpayer and the tax professional both need ERC Tools, as the tax professional is also being
impacted by ERC fraud.
Recently I lost a couple of clients who chose to go with a 3rd-party ERC specialist, even though I
explained to them multiple times why they are not eligible for the credit.
Unfortunately, the cash influx these businesses will erroneously receive places them at a
financial advantage over my clients who are not eligible for and will not receive ERC. This has
impact for years down the road.
I now have multiple clients whose Reps have told them that they are the only ones in their
territories who have not received the ERC. Consequently, these clients have repeatedly asked
me if I am certain they are not eligible. As you can imagine, this is negatively impacting my
relationship with these clients, and two of them have been clients for nearly 40 years.
In the past few weeks, I have started to hear rumbles in the small practitioner community of tax
professionals just giving up and saying they are done. That if they are going to lose their clients
to these 3rd-party mills, they are just going to join them, make the money off ERC, and go on
down the road. If they can make enough money, they can stop preparing returns.
To make matters worse, word is out that the IRS cannot audit their way out of this one and that
if the taxpayer’s income is under the $400,000 threshold, there is little or no chance of audit.
Once ethical practitioners and small business are weighing the odds of being audited vs the
benefits of the influx of cash. It is coming down to them making a business decision, not a tax
compliance decision.
This stands to jeopardize our voluntary tax system as we have known it.
As practitioners, we need guidance.

We need guidance to be able to show our clients clearly why they do or do not qualify.
In that effort, this is what an ERC search on IRS.gov provides today:
Beware of ERC Scam Promotions

    •   Warning signs of aggressive ERC marketing

Eligibility

    •   Shut down by a government order, or
    •   Decline in gross receipts during eligibility periods, or
    •   A recovery startup business
   “For more information see the Employee Retention Credit – 2020 vs 2021 Comparison
   Chart.” This Notice refers to outdated Notices.
Limitations

One paragraph on limitations relating to ERC and PPP.
Definitions of eligibility terms
Notice 2021-20 is a very long Notice, last reviewed or updated March 12, 2021
Notice 2021-23 was last reviewed or updated April 16, 2021

Notice 2021-49 was last reviewed or updated August 20, 2021
Need Help?
“If you need help claiming the credit or correcting your tax return, see tips for choosing a tax
professional.”

How to Claim
File Form 941X.
“If you file Form 941X to claim the Employee Retention Credit…You may need to amend your
income tax return…to reflect that reduced deduction.”
I believe this is where there is a disconnect. Claiming the credit and correcting the tax return are
likely not done by the same people. You are referring taxpayers to a tax professional who is
under the Return Preparers Office (RPO) for income tax returns. ERC is reported on a 941X, a
payroll tax return. Many, if not most, tax professionals do not do payroll tax returns.
There is a disconnect between payroll tax returns and income tax returns. The ERC specialists
assist employers with filing the 941X but do not assist with filing the amended income tax
returns as a result of the ERC credit, leaving our clients looking to us to bring them compliant,
yet we are ethically unable to if we know they are not eligible.
Another source for guidance is the Frequently Asked Questions. However, ERC FAQ’s fall under
Historical Information.
“These FAQs do not reflect the current status of the credit.”
So, there is no current guidance with FAQs.
After the tax professional community asked for specific guidance on an amended 1040X when
the practitioner had not assisted or prepared the amended 941X, on March 7, 2023, Office of
Professional Responsibility (OPR) released Issue Number: 2023-02, Professional Responsibility
and the Employee Retention Credit which does clarify a tax professional’s Diligence as to
Accuracy by stating, “…Practitioners who prepare income, employment, and other tax returns
for clients have a duty of due diligence to inquire of their clients with sufficient detail to
ascertain the information necessary to determine clients’ eligibility for the ERC and to claim the
proper amount of the ERC on the clients’ returns…If the practitioner cannot reasonably
conclude (consistent with the standards discussed in this guidance) that the client is or was
eligible to claim the ERC, then the practitioner should not prepare an original or amended return
that claims or perpetuates a potentially improper credit…”
So, while I and my fellow tax practitioners are bound by our professional responsibilities under
Circular 230, the 3rd-party ERC specialists are accountable to whom?
These 3rd-party mills are creating an unfair playing field in the tax community as they are playing
the odds of not being caught.
And this does not even address the questionably unconscionable fees they are charging for
doing many times nothing more than the clerical work of submitting an ERC claim.
What I see happening in the future, if these 3rd-party mills are not stopped and there are no
consequences for their actions, those of us compliant tax professionals are going to be facing
the backlash. Word will quickly spread from those businesses who erroneously got the ERC and
were able to keep the funds without ramifications that the compliant preparers did not know
what they were talking about. This has the potential to put compliant tax preparers out of
business, or at best negatively impact our bottom line.
Again, this stands to jeopardize our voluntary tax system.
Because the bad players are always moving the bar, I am concerned the example below is what
is coming next. Last week I received this email:
“Hi Larry, came across your company searching for the top Accountants on Linkedin and your
reputation stood out.
We help businesses secure Federal tax credits, particularly the Employee Retention Credit. We
charge a 20% fee, and with an average credit of $250,000, you could earn $12,500 per referral.
One Accountant in our network made $127K in just two months referring clients he knew
would qualify!
Open to a 13m call this week or next to discuss?

Thank you,
Tim Parrish
Owner, Founder
Resolute Tax Credits”

In conclusion, going forward, we need a coordinated effort by all starting at the top. Education,
communication, guidance, maybe even legislation, specifically addressing the unscrupulous that
are taking advantage of the small business community and the tax system. Where will these 3rd
party mills be when small business owners are audited down the road? It will be left to the tax
professionals to represent their clients, because the mills will likely not be here. Yet that is when
small business needs specialists the most.

In the past few weeks, we are beginning to see a movement in the right direction by Treasury
and the IRS. We have a new Commissioner, but we also need an IRS Chief Counsel appointment
to move this forward.


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