Overview
Title
To increase the penalties applicable to persons facilitate fraud with respect to any COVID-related employee retention credit, and for other purposes.
ELI5 AI
H.R. 9738 is a bill that wants to make the rules tougher for people who try to cheat with a special kind of tax credit that businesses got during COVID. It says if someone helps others cheat on these taxes, they can get in big trouble with really big fines to make them stop.
Summary AI
H.R. 9738 is a bill introduced to increase penalties for those who facilitate fraud involving COVID-related employee retention tax credits. The bill outlines higher penalties for promoters who aid in understating tax liabilities related to these credits and mandates due diligence in ensuring eligibility. It also extends the time limit for assessing these credits to six years, and prohibits credit or refund claims after January 31, 2024, unless filed before that date. The bill includes definitions and exceptions, such as excluding certain certified professional organizations from being classified as promoters.
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AnalysisAI
General Summary of the Bill
The bill in question, H.R. 9738, aims to address fraudulent activities related to COVID-19 employee retention tax credits (ERTCs). Specifically, it seeks to enhance penalties for individuals and entities that facilitate or promote fraud involving these credits under the Internal Revenue Code. The bill defines penalties for those who understate tax liabilities, fail to exercise due diligence, or do not comply with requirements about disclosure and maintaining client lists. Additionally, the bill extends the timeframe for assessing improper tax credit claims, with measures applied retroactively to activities after March 12, 2020.
Summary of Significant Issues
Excessive Penalties
One of the most significant issues with the bill is the potentially excessive penalties imposed on entities identified as "COVID-ERTC promoters." The bill proposes penalties that could reach $200,000 for entities, which might be considered disproportionate to the misconduct being targeted. This could deter some businesses from assisting with ERTC claims, even when done legitimately, due to fear of harsh penalties.
Complexity in Definitions and Provisions
The bill's definition of "COVID-ERTC promoter" is complex, relying on multiple conditions tied to gross receipts and percentages. This complexity may create challenges in applying the law correctly and consistently. Furthermore, the language regarding the extension of the assessment period for recovering improperly claimed credits is intricate, potentially causing confusion among taxpayers.
Compliance Burden
By treating COVID-related employee retention tax credits as "listed transactions," the bill imposes significant compliance requirements on those promoting these credits. This action may place undue burdens on stakeholders, including additional paperwork and compliance checks, without clearly defined rationale or evidence that such a broad measure is necessary.
Pre-Enactment Conduct
The bill includes a provision that suggests no inferences should be drawn regarding the knowledge of promoters before the enactment. This could lead to disputes about the application of penalties to conduct that occurred before the law was enacted, creating uncertainties and potential legal challenges.
Potential Impact on the Public
Broad Public Impact:
For the general public, the bill aims to protect against fraudulent activity related to COVID-19 tax credits, maintaining the integrity of tax incentives designed to help businesses retain employees during the pandemic. However, if the application of the bill is onerous or its penalties are seen as too severe, it might discourage legitimate use of these credits, which can negatively affect businesses that genuinely need this financial support.
Stakeholder Impact:
Businesses and Tax Advisors: Those who provide aid or advice regarding ERTCs might face increased scrutiny and legal exposure. The steep penalties could make some advisors hesitant to assist businesses, potentially limiting access to valuable tax relief options.
Tax Auditors and Enforcement Agencies: For these bodies, the bill provides stronger tools for combating fraud, which might improve compliance and enhance revenue recovery from fraudulent claims.
Employers Seeking ERTCs: Firms legitimately using ERTCs may benefit from a reduction in fraudulent claims, leading to more efficient processing of their own credit claims. However, the potential for increased compliance burdens might discourage participation.
Overall, while the intent of the bill is to curb fraudulent actions and safeguard public funds, its execution could impose significant burdens, complicate legitimate use of ERTCs, and generate inadvertent negative effects on well-meaning businesses and advisors. Consideration of these implications and potential adjustments might be necessary to balance deterrence of fraud with the facilitation of genuine tax relief.
Financial Assessment
The proposed bill, H.R. 9738, addresses financial penalties associated with fraudulent manipulation of COVID-related employee retention tax credits. It specifically targets the penalties imposed on promoters who facilitate such fraud and outlines increased penalty amounts as a central financial element.
One notable financial reference in the bill is the imposition of penalties on promoters who assist in understating tax liabilities related to COVID-related employee retention credits. The bill sets the penalties as the greater of $200,000 for entities ($10,000 for natural persons) or 75% of the gross income derived from such fraudulent activities. This reflects a significant financial cost for those found guilty of such misconduct and aims to discourage fraudulent practices. However, as noted in the identified issues, these penalty amounts could be perceived as overly severe, potentially exceeding the level of misconduct, which may raise concerns about proportionality.
Additionally, the bill introduces a penalty structure relating to due diligence requirements. Promoters failing to comply with due diligence requirements are subject to a $1,000 penalty for each failure. This sets a financial expectation for maintaining proper diligence in determining eligibility for tax credits. The requirement ensures that financial advice and assistance about these credits must be substantiated with thorough scrutiny, promoting compliance and integrity.
Moreover, the bill addresses the calculation of what constitutes a “COVID–ERTC promoter” based on financial thresholds. It defines this designation by examining the aggregate gross receipts related to the aid and advice given by promoters. Specifically, if such receipts exceed 20% or 50% of total gross receipts, or amount to more than $500,000, a promoter falls under this category. This complexity in financial definitions could lead to difficulties in interpretation and compliance, especially for smaller businesses or individuals who may not have the resources to thoroughly analyze their financial standing in relation to the criteria.
Lastly, there is a financial implication regarding the limitation on credit and refund claims for these employee retention credits. The bill states that no credit or refund may be given after January 31, 2024, unless a claim was already filed. This effectively sets a financial deadline, impacting businesses or individuals who may seek these credits. By limiting the time frame for claims, the bill introduces financial certainty and a clear cutoff, which could be seen as beneficial for planning. However, it also presents a stringent financial barrier for those who may not be fully aware of the deadline or are still in the process of claiming their credits.
In summary, the financial references and allocations within H.R. 9738 emphasize the imposition of significant penalties as a deterrent against tax credit fraud, reinforce due diligence, and establish a rigid framework for claiming employee retention credits. These allocations and financial structures attempt to tighten control over fraudulent activities, yet they come with potential challenges in terms of perceived severity and complexity that may impact their practical implementation.
Issues
The penalty amounts for COVID–ERTC promoters could be considered excessive, particularly the $200,000 penalty for entities. This might not be proportionate to the level of misconduct as per Section 1(a).
The definition of 'COVID–ERTC promoter' in Section 1(e) is overly complex, involving multiple conditions based on percentages and aggregate gross receipts, which might be difficult to interpret and apply.
The language in subsection (i) regarding the extension of limitation on assessment and its application to improperly claimed ERTC wages is complex and might be challenging for taxpayers to understand.
The provisions in subsection (d) treat any COVID-related employee retention tax credit as a listed transaction for COVID–ERTC promoters, potentially imposing significant compliance burdens without clear justification.
Subsection (l) states that no inference should be drawn regarding knowledge requirements prior to the enactment of the Act, which may lead to confusion or disputes about pre-enactment conduct.
Sections
Sections are presented as they are annotated in the original legislative text. Any missing headers, numbers, or non-consecutive order is due to the original text.
1. Enforcement provisions with respect to COVID-related employee retention credits Read Opens in new tab
Summary AI
The section outlines penalties and requirements for individuals or entities ("COVID–ERTC promoters") who assist with COVID-19 related employee retention tax credit documents. It increases penalties for those promoting tax understatement, treats failure to follow due diligence as knowing misconduct, sets penalties for non-compliance with due diligence, extends assessment time limits for improper credits, and clarifies obligations related to disclosure and client list maintenance.
Money References
- — (1) IN GENERAL.—If any COVID–ERTC promoter is subject to penalty under section 6701(a) of the Internal Revenue Code of 1986 with respect to any COVID–ERTC document, notwithstanding paragraphs (1) and (2) of section 6701(b) of such Code, the amount of the penalty imposed under such section 6701(a) shall be the greater of— (A) $200,000 ($10,000, in the case of a natural person), or (B) 75 percent of the gross income derived (or to be derived) by such promoter with respect to the aid, assistance, or advice referred to in section 6701(a)(1) of such Code with respect to such document.
- — (1) IN GENERAL.—Any COVID–ERTC promoter which provides aid, assistance, or advice with respect to any COVID–ERTC document and which fails to comply with due diligence requirements imposed by the Secretary with respect to determining eligibility for, or the amount of, any COVID-related employee retention tax credit, shall pay a penalty of $1,000 for each such failure.
- (e) COVID–ERTC promoter.—For purposes of this section— (1) IN GENERAL.—The term “COVID–ERTC promoter” means, with respect to any COVID–ERTC document, any person which provides aid, assistance, or advice with respect to such document if— (A) such person charges or receives a fee for such aid, assistance, or advice which is based on the amount of the refund or credit with respect to such document and, with respect to such person’s taxable year in which such person provided such assistance or the preceding taxable year, the aggregate gross receipts of such person for aid, assistance, and advice with respect to all COVID–ERTC documents exceeds 20 percent of the gross receipts of such person for such taxable year, or (B) with respect to such person’s taxable year in which such person provided such assistance or the preceding taxable year— (i) the aggregate gross receipts of such person for aid, assistance, and advice with respect to all COVID–ERTC documents exceeds 50 percent of the gross receipts of such person for such taxable year, or (ii) both— (I) such aggregate gross receipts exceeds 20 percent of the gross receipts of such person for such taxable year, and (II) the aggregate gross receipts of such person for aid, assistance, and advice with respect to all COVID–ERTC documents (determined after application of paragraph (3)) exceeds $500,000.