How Employee Retention Credit helped Innovation Refunds boost its profits

• The ERC was designed to assist small businesses financially during the pandemic. As a result, an industry emerged to aid businesses in claiming these credits, with some taking significant portions of the refunds for their services.
• The Internal Revenue Service temporarily halted new applications for tax credits in September due to concerns about fraudulent claims and questionable practices in the industry. The agency is currently investigating both businesses that claimed the credit and ERC promotion companies that assisted them in submitting applications to the IRS.
• ERC consulting firm Innovation Refunds was prominently advertised as a provider of credit to small business owners. The company charges a 25% fee of the credit claimed, after the business receives payment from the IRS.
• CNBC interviewed 20 former employees and contractors at the company, with many describing a culture of aggressively selling the ERC to small businesses. However, others praised their experiences at the company and its adherence to guidelines, stating that it assisted small businesses in obtaining necessary capital.

The Employee Retention Credit was designed to provide financial support to small businesses facing financial difficulties due to the pandemic.

An industry emerged due to a government program that appeared to have an abundance of funds, which aimed to assist businesses in claiming tax credits. As a result, numerous advertisements promoting the application of these credits appeared. Companies guaranteed quick approvals and made statements asserting that many businesses were eligible for the Employee Retention Credit, or ERC. Additionally, some of these companies took a significant portion of the refunds they received for their services.

The number of requests for financial assistance increased, as companies that qualified for the credit could receive up to $26,000 per employee by submitting revised tax returns for the years in which their operations were impacted by Covid-19.

The IRS has put a hold on new applications for Employee Retention Credit (ERC) claims until 2024 due to concerns about fraudulent claims and the misuse of the program. IRS Commissioner Danny Werfel stated that the ERC program was intended to provide relief to businesses during the pandemic, not to become a source of profit for companies that promote it. The IRS has not named any specific promotion companies or consultants in its announcement.

During the peak of the ERC tax credit, Innovation Refunds, a consulting firm specializing in the ERC, was one of the most prominent advertisers. CNBC interviewed 20 former employees and contractors at various levels of the company, many of whom requested anonymity out of concern for potential retaliation.

A picture emerged from many interviews of a company that prioritized "aggressive" growth and sales of its product, which some referred to as "bullying" or "hounding" of small businesses. However, others spoke positively about their time at the company and its practices, stating that it adhered to guidelines and assisted small businesses in obtaining necessary capital.

How Innovation Refunds works

Innovation Refunds states on its website that it is not a tax professional.

Innovation Refunds acts as an intermediary between small business owners and independent tax attorneys, providing a service that determines if clients are eligible for tax credits and collects their documentation. The company charges a contingency fee of 25% of the refund once it is paid out to the business, as stated on its website.

Innovation Refunds does not determine eligibility for the credit or the amount of money a business should receive. Instead, it contracts independent tax attorneys and professionals to make these decisions.

According to some former employees, Innovation Refunds could potentially be protected from liability if ineligible businesses claimed the credit. However, the company does not sign off on the returns submitted to the agency, and independent tax partners and small businesses are responsible for submitting them. Additionally, Innovation Refunds provides audit protection for small businesses, but the specifics of this protection were not disclosed when asked for comment.

Innovation Refunds declined to participate in this story.

According to two former employees in leadership positions, the company's business model encouraged aggressive tax positions on qualifications to maximize contingency fees. However, they noted that businesses whose eligibility fell into a gray area were put through, while those who were outright ineligible were rejected.

"Let the IRS decide who was qualified and focus on bringing in as many deals as possible," said a former midlevel accounting and finance employee.

The ERC ‘shot clock’

Innovation Refunds spent millions to make businesses aware of its services.

The company advertised on TV during major sports and on CNBC, as well as on radio and social media. The commercials often showcased the CEO, Howard Makler, and Ty Burrell, the lovable dad from ABC's "Modern Family."

No comment was provided by Burrell's representative regarding this story.

Even if a CPA previously told them they don't qualify, businesses should contact Innovation Refunds for a simple application process that could help them qualify in as little as eight minutes.

Our independent tax attorneys will collaborate with your CPA to assess your company's eligibility. Moreover, the company provided $1,000 gift cards to clients who referred other businesses that eventually filed, as per the solicitation emails CNBC reviewed.

The marketing campaign was successful. By May, the company had processed over $4 billion in ERC claims since the credit was introduced. Rob Domenico, the company's former executive vice president of financial partnerships, informed CNBC that the company had processed nearly $7 billion worth of claims and was aware of fewer than 10 clients under audit when he left in mid-September as part of a round of layoffs. He added that all clients had results "moving along positively."

The IRS's moratorium halted advertising for Innovation Refunds and other ERC companies, preventing new applications from being processed.

Instead of a small number of employee retention claims, we are seeing a large amount, according to Werfel, who spoke to reporters on a media call on September 14.

Despite being more than three years old, the program has received over 600,000 unprocessed claims in the last 90 days, with a total of 3.6 million claims submitted since its inception. The IRS has paid out an estimated $230 billion from the program since mid-September.

Small businesses are the driving force behind our mission at Innovation Refunds, as Makler emphasized on LinkedIn.

Many former employees and contractors who were responsible for selling tax credits to businesses claimed that the targets they were expected to achieve were unrealistically high, which led to an "aggressive" sales strategy.

One former contractor stated, "We were repeatedly pressured to call old leads that had already been contacted multiple times."

Nine former employees and contractors described a culture of aggressive sales or growth targets, with several stating that incentives were offered to remain and sell. An internal email obtained by CNBC revealed that all employees hired by March 31, 2023, were eligible for a $100,000 bonus payment if the company closed 50,000 lifetime deals. Former employees stated that deal counts were displayed on a screen at the company's headquarters in Des Moines.

As time passed and prospective customers dwindled, follow-ups with viable leads became increasingly aggressive, according to a former employee.

The employee stated that they would feel suspicious if they received those emails or calls, and they would avoid it. They also mentioned that the company's advertising attracted many owners. However, the employee pointed out that the company lacked clear guidelines for sales staff to communicate with customers until January.

‘It only takes eight minutes to qualify’

According to IRS guidelines, businesses can qualify for the ERC refund through two methods: the "gross receipts" test, which requires showing revenue losses, or if a government order affected the business. The IRS updated the language around the guidelines until September. Some have criticized the credit's guidelines, which were open to interpretation, for allowing promoters to profit off small business submissions.

According to CNBC, most small businesses that received Innovation Refunds for the ERC credit did so through the "limited commerce" method, which is less clear-cut and subjective. Several former employees and contractors told CNBC that they understood limited commerce to be more subjective and encouraged many businesses to apply through this method.

CNBC reported on a conversation between Innovation Refunds and a potential client prior to the Sept. 14 moratorium, where a sales representative informed the company that one of its third-party tax firms had qualified it under "limited commerce" due to pandemic shutdown orders, even though the business was able to operate remotely. However, the IRS issued updated guidance as of the September moratorium, stating that if all employees were able to telework during the pandemic and the business continued to operate, the business was not suspended.

According to Innovation Refunds' website, the IRS believes that 70-80% of small and medium-sized businesses (SMBs) are eligible for the Employee Retention Credit (ERC). However, in a statement to CNBC, the IRS clarified that they have not released any estimates regarding the percentage of taxpayers who will qualify for the ERC.

A former contractor stated that tax attorneys would reject "totally questionable" claims, but only a small percentage of the applications they oversaw were denied.

Innovation Refunds sent potential customers preapproval notices for more than $300,000, with titles such as "Apply or Say Goodbye" and "Save your place in line" to encourage them to apply for the credit.

Out of the 20 former employees and contractors interviewed by CNBC, five had positive experiences at the company.

Domenico, the former executive vice president of Innovation Refunds, wrote on LinkedIn that the company's employees "take pride in being ultra conservative and compliant." He also stated that most of the company's leads were already attracted to the marketing and many businesses initiated outreach to Innovation Refunds as a result.

A client who applied for the ERC through Innovation Refunds reported a "seamless" process. They felt comfortable using the company because it had licensed and insured tax attorneys.

The client commended their work, stating that the process was seamless and they were consistently updated by multiple employees.

Lavish events and layoffs

Numerous ex-employees and contractors who spoke to CNBC claimed that the company prioritized employee well-being and provided tempting bonuses - initially.

A free-spending culture also emerged as the company pursued business.

Three former employees described the lavish large-scale events hosted by Innovation Refunds for employees, including a holiday party where the company hired a marching band, had interpretation artists entertain guests, and decorated the venue with Innovation Refunds-themed ice sculptures.

The former employee stated that they witnessed excessive use of capital in irresponsible ways, including hosting lavish parties and giving employees extravagant gifts.

Numerous ex-staff and freelancers informed CNBC that the promise of substantial bonuses and a steady stream of clients initially attracted them to the job. However, as time passed and the client base dwindled, the allure of bonuses turned out to be a hollow promise, as many claimed there were insufficient leads to justify the $100,000 salary.

One former contractor stated, "We were focusing on recycled leads, but as we neared the end, complaints escalated daily from both sides."

Several rounds of layoffs at Innovation Refunds left many former workers fearful of losing their jobs, according to CNBC.

Slack messages were sent to employees who lost their jobs, and their computer access was shut down. Many received 30 days of severance. Makler, visibly affected, spoke briefly on a Zoom call.

According to a video recording obtained by CNBC, the employees who remained after the layoffs were instructed to gather around a fire and toss a piece of paper with a negative emotion written on it into the flames.

Makler stated on the video, "We will appear as a group of total oddballs."

In the video, dozens of employees are gathered in a circle outdoors, with Makler at the center, explaining the practice. Makler then tosses a piece of paper into the fire.

"With that, we can keep the energy here to improve things for everyone," he stated.

Concerns across the industry

The IRS is now probing a burgeoning industry that advertises the ERC program to small business owners, as well as examining certain companies that claimed the credit.

The Department of Justice is now investigating fraud that is driven by aggressive marketing, as stated in the agency's moratorium announcement, without identifying any specific companies.

The IRS, having been cautioning businesses about ERC scams for several months, continued to update eligibility instructions for ERC program submissions, which have been open since 2020, throughout the moratorium.

Small businesses may not be eligible for the ERC promotion, as CPAs, attorneys, and consultants have raised concerns across the industry.

Jenn McCabe, a partner at Armanino LLP, told CNBC that the rules were being completely disregarded as businesses sought credit.

Small businesses that were previously ineligible for the program may have unknowingly applied, despite the IRS's updated guidelines.

McCabe lamented that he spends a lot of time assisting individuals in determining their eligibility a year after they have already received the funds, which is disheartening.

Small businesses that submitted incorrect claims could be required to repay the money they received and may also face penalties.

The IRS announced in September that it is working on initiatives to assist business owners, including a settlement program for repaying ERC claims that were incorrectly received. In mid-October, the IRS unveiled a special option for those whose claims have not been processed yet but who believe they were incorrectly filed to either withdraw them entirely or reduce the amounts.

The former Innovation Refunds employee stated that they are uncertain if they will ever be able to determine if a task was completed correctly on a case-by-case basis. However, the possibility of individuals owing a significant amount of money back makes them uneasy.

The IRS has identified ERC scams as the top tax scheme on its "Dirty Dozen" list for 2023. The agency warns against unsolicited calls, ads promoting an easy application process, and fees based on a percentage of the refund amount as potential red flags. Many ERC promoters used these tactics during the marketing craze that occurred.

"The promoters should be held accountable for their mistakes, as they have trained large sales organizations and set themselves up to be distanced from these errors. They have planned for this and are sophisticated," McCabe stated.

— CNBC’s Damita Menezes contributed to this report.