You can add the Internal Revenue Service to the ranks of federal agencies conceding that raining taxpayer money on all and sundry to offset the negative effects of pandemic-era closures didn't go as well as intended. Not only was a program meant to offset the cost of paying workers during lockdowns and voluntary social-distancing prone to being gamed, but the "vast majority" of claims submitted to the program show evidence of being fraudulent.

The Tax Man Is Shocked To Discover Fraudsters

In the course of a detailed review of the Employee Retention Credit, "the IRS identified between 10% and 20% of claims fall into what the agency has determined to be the highest-risk group, which show clear signs of being erroneous claims for the pandemic-era credit," the IRS announced June 20. "In addition to this highest risk group, the IRS analysis also estimates between 60% and 70% of the claims show an unacceptable level of risk."

The Employee Retention Credit was offered to businesses that were shut down by government COVID-19 orders in 2020 or the first three quarters of 2021, experienced a required decline in gross receipts during that period, or qualified as a recovery startup business at the end of 2021. But it was clear early on that scammers were taking advantage of giveaways of taxpayer money, either to claim it for themselves or to pose as middlemen helping unwitting business owners file claims.

In March of 2023, the tax agency warned of "blatant attempts by promoters to con ineligible people to claim the credit." In September of that year, it stopped processing claims amidst growing evidence that vast numbers of applications were "improper," as the IRS delicately puts it. In March 2024, the agency announced that its Voluntary Disclosure Program had recovered $1 billion (since raised to over $2 billion) in improper payouts from participants who got to keep 20 percent of the take.

Ultimately, only "between 10% and 20% of the ERC claims show a low risk" for fraud, even by generous federal standards for throwing other people's money at problems largely of government creation.

"We will now use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to help taxpayers without any red flags on their claims," commented IRS Commissioner Danny Werfel.

As of the end of May, the IRS "has initiated 450 criminal cases, with potentially fraudulent claims worth nearly $7 billion."

There's More Fraud Where That Came From

Of course, this is only the tip of the iceberg when it comes to pandemic stimulus fraud.

In April, Attorney General Merrick Garland boasted that the COVID-19 Fraud Enforcement Task Force (yes, it's widespread enough to rate its own task force) had "charged more than 3,500 defendants, seized or forfeited over $1.4 billion in stolen COVID-19 relief funds, and filed more than 400 civil lawsuits resulting in court judgements and settlements."

Strong work. But the various pandemic stimulus bills tallied up to trillions of dollars. And a lot more than a few billion ended up in the hands of grifters.

"The total amount of fraud across all UI [unemployment insurance] programs (including the new emergency programs) during the COVID-19 pandemic was likely between $100 billion and $135 billion—or 11% to 15% of the total UI benefits paid out during the pandemic," the Government Accountability Office warned last September.

Earlier, the Small Business Administration's Inspector General found more than $200 billion stolen from the Economic Injury Disaster Loan (EIDL) program and Paycheck Protection Program (PPP). "This means at least 17 percent of all COVID-19 EIDL and PPP funds were disbursed to potentially fraudulent actors," noted the report.

With between 70 percent and 90 percent of claims for the Employee Retention Credit identified as likely scams, either the IRS is a stand-out magnet for grifters or other agencies need to return to their own investigations with a somewhat more skeptical eye.

Stimulus Fueled Inflation as Well as Fraud

It's maddening enough that the federal government is handing out vast sums of money to con artists. But Americans are contending with a 2024 economy in which the U.S. Bureau of Labor Statistics' own inflation calculator finds that it takes $124.77 to purchase what $100 bought in 2019, before anybody heard of COVID-19. Federal stimulus programs are directly to blame for much of that inflationary slippage in the dollar's buying power.

"U.S. fiscal stimulus during the pandemic contributed to an increase in inflation of about 2.6 percentage points in the U.S.," three economists with the Federal Reserve Bank of St. Louis estimated last year. The reason, they said, was that governments "injected large amounts of money into the economy"—money created from thin air to artificially pump up the economy.

"Inflation comes when aggregate demand exceeds aggregate supply," agreed economist John Cochrane of the Hoover Institution and the Cato Institute in a March piece for the International Monetary Fund. "The source of demand is not hard to find: in response to the pandemic's dislocations, the US government sent about $5 trillion in checks to people and businesses, $3 trillion of it newly printed money, with no plans for repayment."

Officials justified the stimulus as a necessary evil to offset economic collapse from often-mandatory pandemic closures by keeping demand flowing with government checks. After conceding that stimulus fueled inflation, the St. Louis Federal Reserve economists argued that massive spending likely prevented "worse outcomes despite the price pressures that may have resulted from the spending."

But officials could have refrained from issuing closure orders so the economy could function without mandated disruptions. That would have made the creation of trillions of dollars from thin air and its distribution around the country entirely beside the point. Then, grifters wouldn't have opportunity to scam hundreds of billions of dollars out of federal agencies, including the IRS.

It's nice that the IRS, like other federal agencies, is catching up with the vast fraud it enabled. But it would be better if government officials weren't constantly addressing problems they created.

The post 'Vast Majority' of Pandemic Employee Retention Credit Claims Are Likely Scams, Says IRS appeared first on Reason.com.

Remember when Republicans were against using the tax cops to go after political opponents? Well, they seem to have changed their minds.

House Oversight Committee Chairman James Comer (R–Ky.) has made no secret of his desire to use finance laws against left-leaning activists. A few months ago, he complained that the IRS was going too easy on progressive nonprofits. Now he's found another angle of attack: insinuating that these organizations are part of an anti-Israel conspiracy.

Comer and House Education Committee Chairwoman Virginia Foxx (R–N.C.) are "investigating the sources of funding and financing for groups who are organizing, leading, and participating in pro-Hamas, antisemitic, anti-Israel, and anti-American protests" on college campuses, they announced in a Tuesday letter.

"This investigation relates both to malign influence on college campuses and to the national security implications of such influence on faculty and student organizations," Comer and Foxx wrote.

Foxx objected when the shoe was on the other foot. In 2013, it was revealed that the IRS had been placing extra scrutiny on nonprofits whose paperwork included terms such as tea party and patriot. Foxx wrote an op-ed criticizing the "outrageous" demands for information that IRS investigators had made.

"The problem at the IRS is with more than the search terms it used. Whether conservative or liberal, targeting Americans is wrong," she stated. "The deeper problem is that government's taxing arm ever came to consider itself the arbiter of what constitutes legitimate free speech in the first place."

Asked about Foxx's earlier statements, her spokesman Alex Ives wrote to Reason that "what you are positing amounts to false equivalencies on many levels." He stated that Foxx was seeking to "ensure groups do not have financial ties to designated Foreign Terrorist Organizations," without citing specific examples.

"Do groups on campuses have a right to free speech? Of course," Ives said. "Do they have a right to have their ties to foreign financiers connected to terror organizations to go unscrutinized? Of course not."

The letter from Foxx and Comer demands that the Department of the Treasury provide all Suspicious Activity Reports, or bulletins on potential tax evasion and money laundering, for 20 different organizations. The list includes Students for Justice in Palestine and its sponsor, the WESPAC Foundation. It also names off-campus Muslim and Palestinian-American groups, Jewish peace movements, and many organizations that are not primarily focused on the Israeli-Palestinian conflict.

"This is part of a broader effort to demonize parts of the tax-exempt sector that a part of the Republican Party views as a key target in the war on woke," says Lara Friedman, president of the nonprofit Foundation for Middle East Peace, which has been tracking Congress' stance on the Israeli-Palestinian conflict. "If you make this about supposedly fighting antisemitism, you bring parts of the Democratic Party with you."

Many of the groups listed are big names in progressive philanthropy: George Soros' Open Society Foundations, the Pritzker family's Libra Foundation, the Rockefeller Brothers Fund, and the Bill & Melinda Gates Foundation.

The Rockefeller organization gave several hundreds of thousands of dollars to Jewish Voice for Peace; another Jewish group for Palestinian rights called IfNotNow; the Adalah Justice Project, a Palestinian-American rights group; and Palestine Legal, a legal aid service for pro-Palestinian advocates in America.

"The RBF has had no direct involvement in the campus protests nor have we earmarked funds for them," Rockefeller Brothers Fund spokeswoman Sarah Edkins said in a statement last week. "Some RBF grantees have provided training, messaging, and/or legal support to student protest leaders. The Fund does not direct the activities of any grantee organizations."

Edkins added that the fund "respects Israel's right to exist and supports the right to self-determination for both the Israeli and Palestinian peoples."

The Open Society Foundations also gave several hundreds of thousands of dollars to Jewish Voice for Peace and IfNotNow, according to Rolling Stone. The grant-making network told Politico that it "has funded a broad spectrum of US groups that have advocated for the rights of Palestinians and Israelis and for peaceful resolution to the conflict in Israel."

It's not clear why the Bill & Melinda Gates Foundation and the Libra Foundation wound up on the list. Last week, Politico named them as supporters of pro-Palestinian protests, because of their donations to the Tides Foundation, a clearinghouse for progressive groups that funds Jewish Voice for Peace, IfNotNow, Adalah, and Palestine Legal. But the Gates and Libra donations were earmarked for other causes.

Jewish Voice for Peace says that the congressional letter is "inaccurate, dangerous and a desperate attempt by right-wing legislators to criminalize public protest. These legislators are falsely and libelously smearing tens of thousands of students as antisemitic, simply because they are protesting the use of their tuition dollars in the massacres of Palestinian families."

Two of the groups listed in the letter, American Muslims for Palestine (AMP) and the Council on American-Islamic Relations, also offered statements to Reason. The Libra Foundation declined to comment, and the Gates Foundation pointed to its comments to Politico. None of the other groups responded to emails asking for comment.

"AMP looks forward to demonstrating in any jurisdiction that it operates wholly within the laws of the United States, compliant with all laws and regulations governing U.S. nonprofit entities," the organization's attorney Christina Jump says. "AMP operates completely within the United States, raises funds completely within the United States, and utilizes those donations completely within the United States to support its mission of educating American Muslims and the American public on the rich history and culture of Palestine."

Edward Ahmed Mitchell, deputy director of the Council on American-Islamic Relations, says that the letter "reads like a bad impersonation of Joseph McCarthy. Instead of advancing the goals of a foreign government by pursuing witch hunts against the American people, Rep. Foxx, Rep. Comer and other genocide-enablers in Congress should focus on washing the blood of over 30,000 slaughtered Palestinian civilians off their hands."

Republicans are not the only ones trying to bring the U.S. tax code into the Israeli-Palestinian conflict. In New York, some Democrats are trying to strip away nonprofit status from organizations that operate in Israeli settlements in the Palestinian territories. New York–based nonprofits have raised money to buy drones for settler militias and to maintain a military academy in a West Bank settlement.

The House Ways and Means Committee held a hearing in November 2023 on the "nexus" between campus protests and "terror financing." Soon after, the House passed a bill allowing the secretary of the treasury to shut down nonprofits based on vague insinuations of terrorist support. Last week, 15 Republican senators called on the IRS to revoke the nonprofit status of any organization that supported Students for Justice in Palestine.

Friedman, the Foundation for Middle East Peace president, believes that the congressional letter is more likely to have a "chilling effect" on nonprofits than to turn up any real evidence of illegal activity.

"It's partly a fishing expedition," she says. "And by lodging an accusation, they hope to paint a picture in the mind of the public."

The post Congressional Republicans Launch 'Fishing Expedition' Against Progressive, Jewish, and Palestinian Nonprofits appeared first on Reason.com.

Another Tax Day has come and gone, and most Americans believe they pay too much. One recent poll revealed that 56 percent say they pay more than their fair share. Unfortunately, I fear this is just the beginning considering the insane level of debt Washington policymakers have accumulated over the years. With this in mind, here are some important facts about our tax system that you might not know.

The payroll tax is the heaviest burden for most taxpaying Americans, but the income tax is more visible and painful to a lot of people. While we are accustomed to it—and while it affects some Americans' decisions about how much to work, invest, or save—the income tax didn't exist for most of our country's life.

In 1895, the Supreme Court ruled against a direct tax on the incomes of American citizens and corporations, something that had been included in the previous year's Wilson-Gorman Tariff Act. The court found that such a tax violated the constitutional requirement that tax apportionments among the states be based on population. It took a constitutional amendment—the 16th—to eventually change that and pave the way for the modern income tax.

The very first Internal Revenue Service Form 1040, introduced in 1913 after the ratification of the 16th Amendment, was remarkably straightforward compared to what we know today. It was only four pages long, including instructions, and the top tax rate was 7 percent on incomes above $500,000, which is over $15 million in today's dollars. Some people were horrified by a 7 percent tax and warned that it could put us on a slippery slope to higher rates—maybe even above 10 percent (!)—imposed on a vast majority of people. They were called crazy for fearing such a thing.

And yet, as predicted by a few realists, the income tax rate not only increased, but the threshold at which it's applied went down. During the 1950s and the Eisenhower administration, the top marginal tax rate on incomes reached 91 percent for individuals. This rate applied to incomes over $200,000 (about $2 million today) for single filers and $400,000 (about $4 million today) for married couples filing jointly. These high taxes were part of a broader policy to manage post-war fiscal adjustments and fund federal programs. These rates also failed to raise as much money as you would think due to many loopholes in the tax code.

While the top marginal rate is much lower today, the income tax code remains remarkably complicated. Will McBride, a scholar at the Tax Foundation, recently wrote that "as of 2021, the U.S. income tax code was 4.3 million words long and growing. That's much longer, and presumably much more complicated, than tax codes found in other countries." There are several reasons for this.

First, many welfare programs are administered through the tax code. In recent testimony before the Senate Budget Committee, the Cato Institute's Chris Edwards wrote, "The tax code is an increasing mess. The number of official tax expenditures has risen from 53 in 1970 to 205 today, making IRS administration and enforcement ever more difficult. We know from experience that complex tax expenditures, such as the low-income housing tax credit and earned income tax credit, generate substantial errors and abuse."

In addition, contrary to common belief, the U.S. income tax system is actually quite progressive. According to the Tax Foundation, "though the top 1 percent of taxpayers earn 19.7 percent of total adjusted gross income, they pay 37.3 percent of all income taxes. Just 3 percent of taxes are paid by the lowest half of income earners." Maintaining this progressivity through all kinds of tax provisions increases the complexity of the code.

This progressivity is generally ignored by those who argue that taxing the rich is the solution to reducing the burgeoning U.S. national debt. Soaking the rich, while perhaps appealing in its simplicity, misses the scale of the problem. Brian Riedl, a Manhattan Institute senior fellow, noted that if we were to confiscate 100 percent of the income of everyone making over $500,000 per year, it would fund the government for less than a year. This puts into perspective the enormity of the $34 trillion national debt versus the income of the rich.

Taxing the rich is a convenient distraction hiding the reality that if spending isn't cut, taxes will have to be raised on everyone, a lot. On this tax week, I suggest Congress starts cutting.

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The post This Tax Week, Remember That the Federal Income Tax Is Relatively New appeared first on Reason.com.