Tax Preparer Arrested For Seeking Over $124 Million In Phony Tax Credits

For months, the IRS has warned taxpayers that the Employee Retention Credit—or ERC—has become a magnet for fraud. Last week, IRS Commissioner Danny Werfel emphasized that the agency had “entered a new phase of increasing scrutiny on dubious submissions.” That focus appears to be paying off—a tax preparer has been arrested for seeking more than $124 million in pandemic-related employment tax credits.

The Department of Justice has announced the arrest of Leon Haynes of Teaneck, New Jersey. According to court documents, beginning around November 2020, Haynes prepared and filed Forms 941 claiming pandemic-related credits for clients and his own businesses. He allegedly told some clients that the government was giving out pandemic-related relief money for businesses and that they were eligible because they had a business. He told other clients that the money was a grant.

Allegations

In at least one instance detailed in court documents, Haynes approached an individual in or around 2021 about seeking pandemic relief. He told the individual that the government was giving out “free money” to people with a business—that individual did not have employees or payroll.

More than a dozen of Haynes’ clients confirmed to the government that the Forms 941 he prepared and filed for them wrongly reported the number of their employees and wages. The complaint further says the clients did not provide that information used on the Forms 941 despite Haynes telling law enforcement that they did.

Dollars Involved

In total, Haynes is accused of preparing and filing at least 1,387 false Forms 941 claiming a total of $124,751,995.08 in fraudulent tax refunds.

Based on Haynes’ false claims about his own companies, the U.S. Treasury mailed him multiple tax refund checks totaling more than $1 million. However, his own businesses had no employees and did not issue any Forms W-2. He subsequently told law enforcement his businesses had only hired contractors during the pandemic and were ineligible to receive credits.

Haynes’ clients also received money. The government paid at least $31.6 million in fraudulent tax refunds for Haynes’ clients.

Fees

According to the complaint, Haynes charged each client a fee of approximately 10% of the tax refund the client received from the U.S. Treasury. According to IRS, charging fees based on a percentage of the refund amount of ERC is one of the warning signs of aggressive ERC marketing to watch out for. The IRS warns that taxpayers should always avoid a tax preparer basing their fee on the size of the refund.

Scams

The arrest was the result of actions involved a number of federal agencies, including IRS–Criminal Investigation, Social Security Administration, Office of the Inspector General, and the U.S. Postal Service. The government has vowed that it won’t be the last.

“While our country was fighting the spread of the virus and its profound economic impact, Haynes allegedly scammed the system in a massive scheme to line his own pockets,” U.S. Attorney Philip R. Sellinger said. “As described in the complaint, Haynes abused his position as a tax preparer to steal millions of dollars by submitting over 1,000 false applications for funds set aside to help legitimately struggling businesses. My office and our partners will continue to find and prosecute fraudsters who exploited the pandemic for personal gain.”

ERC And Pandemic-Related Relief

The ERC is available to employers who paid qualified wages to some or all employees after March 12, 2020, and before January 1, 2022. Typically, to qualify, you must demonstrate that your business was shut down by a government order due to the pandemic during 2020 or the first three calendar quarters of 2021 or that you experienced a specific decline in gross receipts during the eligibility periods during 2020 or the first three calendar quarters of 2021. Some businesses may also qualify as a recovery startup business for the third or fourth quarters of 2021 (otherwise, the ERC relief was phased out by Congress for businesses for that period).

The credit is 50% of up to $10,000 in wages, meaning that it can be as high as $5,000 per employee in 2020 and as high as $21,000 per employee in 2021 (totaling the $26,000 per employee that is regularly touted).

The ERC is available to most kinds of businesses, including tax-exempt businesses. It is not available to individuals, including freelancers and independent contractors.

Congress also authorized the IRS to give a credit against employment taxes to reimburse businesses for the wages paid to employees on sick or family leave who could not work because of COVID-19. This “paid sick and family leave credit” was equal to the wages the business paid the employees during the sick or family leave, also subject to a maximum amount.

Charges

The government alleges that Haynes repeatedly exploited these wage-based programs by preparing and submitting false Forms 941 to the IRS. The Form 941 series are sometimes called payroll tax returns and are used to report wages paid to employees. They are also used as a starting point for claiming pandemic-related credits which were intended to assist employers during Covid.

“As many of us suffered through the pandemic, Leon Haynes found a way to line his pockets at our expense,” Christopher Nielsen, Postal Inspector in Charge of the Philadelphia Division, said. “He allegedly filed over $100 million worth of fraudulent tax returns, stealing money from programs designed to support suffering businesses. Working with our colleagues at the IRS Criminal Investigative Division and the United States Attorney’s Office, we have begun the process of holding him accountable for his frauds.”

Overall, Haynes is charged with eight counts of aiding and assisting the filing of false tax returns and one count of mail fraud.

Each count of aiding and assisting in the preparation of false returns carries a maximum penalty of three years in prison and a $250,000 fine. The mail fraud charge carries a maximum penalty of 20 years in prison and a $250,000 fine or twice the gross gain to the defendant or gross loss to the victim, whichever is greatest.

“Today’s arrest demonstrates IRS Criminal Investigation and our law enforcement partners commitment to holding accountable those who exploited the pandemic for personal gain,” Tammy Tomlins, Special Agent in Charge of the Newark Field Office, said. “We are committed to rooting out pandemic-related fraud and holding accountable anyone seeking to profit from the public health emergency.”

IRS Stance On ERC

The IRS is clearly frustrated by the increased attempts to convince taxpayers that every employer qualifies for the credit. On July 27, 2023, the IRS updated its “Frequently asked questions about the Employee Retention Credit.”

Question 1 reads, “Is every business eligible for the Employee Retention Credit?”

The answer, as written, is simply, “No.”