Child Tax Credit Boost: Business Tax Break Shutdown Due to 95% Fraud Claims Means More Money for Low-Income Families

Senators were shocked when IRS Commissioner Danny Werfel revealed that approximately 95% of COVID-era tax break claims made by businesses were allegedly fraudulent, according to a whistleblower's estimate. Senate Finance Committee Chairman, Sen. Ron Wyden, recounted the commissioner's acknowledgment, sparking urgent Congressional action.

Initially established to incentivize businesses to retain employees during the pandemic, the employee retention tax credit has faced unforeseen challenges. Originally projected to cost the federal government $55 billion, the program's expenses have surged to nearly five times that amount as of July, with ongoing fraudulent claims continuing to inflate the tally.

Lawmakers from diverse political backgrounds, including Sen. Elizabeth Warren and Sen. Ron Johnson, find common ground in advocating for the program's immediate closure. Citing universal fraud and lax oversight, legislators agree that the employee retention tax credit has become untenable and must be swiftly dismantled.

Savings from Tax Break Can Enhance Child Tax Credit

To offset the costs associated with ending the tax credit, lawmakers are considering a plan to generate an estimated $79 billion over the next decade. This money would be redirected to fund three business tax breaks and enhance the child tax credit for low-income families, providing an average tax cut of $680 in the first year.

The child tax credit, initially set at $2,000 per child, has a refundable portion of $1,600, allowing access for parents with minimal federal income tax liability. A recent agreement by congressional tax writers proposes escalating the maximum refundable child tax credit to $1,800 for 2023, $1,900 for the subsequent year, and $2,000 for 2025 tax returns. Advocated by the Center on Budget and Policy Priorities, this liberal think tank estimates that around 16 million children in low-income families stand to benefit from the proposed expansion of the child tax credit.

Read Also: Tax Relief Bill for Workers and Families Expand Provisions for Disaster-Affected Individuals With Specific Exclusions from Gross Income

Challenges and Potential Benefits of Legislation

Despite broad bipartisan support in a House committee vote (40-3), passing the proposed legislation faces challenges in the Senate, especially in an election year. Senators express concerns about various aspects of the bill, and its fate remains uncertain.

The Joint Committee on Taxation proposes speeding up the program's wind-down and imposing stricter penalties on those promoting improper claims. This move aims to curb fraudulent applications and enhance the overall integrity of the tax credit system.

IRS Response and Countermeasures

The IRS, grappling with a surge in potentially fraudulent claims, temporarily halted the acceptance of tax credit applications in September. Recent updates indicate that the agency has initiated thousands of audits and criminal investigations, with measures in place to address fraud and decrease the backlog of legitimate claims.

Lawmakers acknowledge the well-intentioned origins of the program but express reservations about its unintended consequences. Sen. Mark Warner sums up the sentiment, noting the challenges faced by the employee retention tax credit despite its initial good intentions.

Related Article: Child Tax Credit Boost Unlocks Potential $680 Savings, Will Monthly Payments Return?