How Innovation Refunds cashed in on the Employee Retention Credit

The Employee Retention Credit was intended to be a financial lifeline to small businesses struggling to make ends meet during the pandemic.

The government program, seemingly flush with cash, led to the emergence of an industry of its own, which focused on helping businesses claim the credits. Suddenly, a parade of ads encouraging businesses to apply for the credit were everywhere. Companies promised fast approvals and made statements claiming many businesses qualify for the Employee Retention Credit, or ERC. Some of the companies also took large percentages of the awarded refunds for their services. 

Demand for the aid surged, as businesses deemed eligible for the credit could claim up to $26,000 per employee by submitting amended tax returns for years in which their operations were affected by Covid-19.

In September, the Internal Revenue Service, the agency that processes these credits, put a moratorium on new applications until 2024. The agency cited “questionable claims” and “fraud” concerns across the entire industry. IRS Commissioner Danny Werfel said the ERC program was not meant to become a “gravy train” for companies that promote and profit from the refund. The IRS has not named individual promotion companies or consultants.

Innovation Refunds — a consulting firm that focuses on the ERC — was one of the most visible advertisers during the tax credit’s heyday. CNBC spoke to 20 former employees and contractors at varying levels of the company, many of whom requested to remain anonymous due to fears of retaliation.

From many of those interviews, a picture emerged of a company focused on “aggressive” growth and sales of the product that some called “bullying” or “hound”[ing] of small businesses, up against a “shot clock” to cash in on the ERC. But others spoke well of both their time at the company and its practices, saying it complied with guidelines and helped small businesses access needed capital.

On its website, Innovation Refunds makes it clear it is not a tax professional.

The company is positioned as a middleman between small business owners and independent tax attorneys. Innovation Refunds markets to clients, determines if they are viable candidates for the credit and then collects businesses’ documentation. For its services, it charges a contingency fee, which amounts to 25% of the refund once it’s paid out to the business, according to its website.

Innovation Refunds does not, however, make the final decision on eligibility for the credit or determine how much money a business should receive. For this, it says it contracts independent tax attorneys and professionals. 

Some former employees said this could insulate Innovation Refunds from potential liability if ineligible businesses claimed the credit. Innovation Refunds doesn’t sign off on the returns submitted to the agency — the independent tax partners and small businesses do, according to documents viewed by CNBC. The company also says it provides audit protection for small businesses, but would not outline what that entails when asked for comment.

Innovation Refunds declined to participate in this story.

A former employee in a leadership position said, in their opinion, because of this business model “management was encouraged to take aggressive tax positions on qualifications in order to maximize their contingency fee.” Two other former workers echoed this view, saying the company put through businesses whose eligibility fell into a gray area. This was not the case, however, for those who were outright ineligible, as those businesses were rejected, the two former workers said.

“Get as many deals through the door and let the IRS decide who was qualified,” as one former midlevel accounting and finance employee put it.

The ERC ‘shot clock’

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

The company had ads appear on television during major sporting events and on CNBC, as well as radio and on social media. Many of the commercials featured the company’s CEO, Howard Makler, and Ty Burrell, the affable father figure from ABC’s “Modern Family.”

A representative for Burrell did not respond to requests for comment on this story.

Some of these commercials touted a simple application process for small business owners, saying they could qualify in as little as eight minutes. In another TV ad, the company encouraged businesses to contact Innovation Refunds even if a CPA previously told them they don’t qualify.

“Our independent tax attorneys will work with your CPA to determine if your company is eligible,” the ad said. In addition to these promotions, the company offered $1,000 gift cards to clients who referred other businesses that wound up filing, according to solicitation emails CNBC reviewed.

The marketing worked. Through May, the company said it had processed more than $4 billion in ERC claims since the credit was introduced. Rob Domenico, the company’s former executive vice president of financial partnerships, told CNBC the company had processed nearly $7 billion worth of claims and he was aware of fewer than 10 clients under audit when he left in mid-September as part of a round of layoffs, adding all had results “moving along positively.”

But advertising came to a halt for Innovation Refunds and other ERC companies after the IRS announced the moratorium that paused all new applications.

“We believe we should see only a trickle of employee retention claims coming in. Instead, we are seeing a tsunami,” Werfel told reporters on a media call Sept. 14.

The agency at the time said its inventory of unprocessed claims was over 600,000, virtually all of which had been received in the last 90 days, even though the program is more than three years old. Since its inception, more than 3.6 million claims have been submitted, with an estimated $230 billion paid out from the program since mid-September, according to the IRS.

Makler promoted the idea that Innovation Refunds’ mission was to help small businesses. “Small businesses are the foundation of our economy and are the motivation behind the work we do here at Innovation Refunds,” he wrote on LinkedIn.

But former employees and contractors, many of whom were tasked with selling the tax credit to businesses, said the metrics they were supposed to hit were “unrealistically high,” which fostered an “aggressive” outreach approach.

“It was being pushed down our throat to call, call, call, old leads that had already been called many times,” one former contractor said. 

Nine former employees and contractors spoke of a culture of aggressive sales or growth targets, with several noting incentives to stay and sell. An internal email CNBC obtained said 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 said deal counts were broadcast on a screen at the company’s headquarters in Des Moines.

Another former employee said that as time passed, and prospective customers ran dry, the follow-ups with viable leads only got more aggressive.

“If I were somebody receiving those emails or calls, I would feel like it was very scammy or spammy, and I would stay away from it,” they said. The employee added that the company’s visible advertising enticed many owners. But the person said the company did not initially have proper guidelines in place for sales staff for communicating with customers, adding that it didn’t provide those rules until January.

There are two ways businesses can qualify for the ERC refund, according to IRS guidelines. The first is  through a “gross receipts” test — a more black-and-white method where a business needs to show revenue losses. The second way to qualify is if a government order impacted the business. The IRS continued to update language around the guidelines through September. Some have said the credit’s guidelines, certain of which were open to interpretation, paved the way for promoters of the credit who profited off small business submissions.

Former employees and contractors CNBC spoke with said most of the small businesses Innovation Refunds approved for the ERC credit were greenlit through the less clear-cut method, which it refers to as “limited commerce” on its website and in customer communications. Several former employees and contractors also told CNBC they understood limited commerce to be more “subjective” and encouraged many businesses to apply through this method. 

CNBC viewed an exchange between Innovation Refunds and a potential client prior to the Sept. 14 moratorium, where a sales representative told the company one of its third-party tax firms qualified it under “limited commerce” due to pandemic shutdown orders, even though the business was able to operate remotely. The IRS issued updated guidance as of the September moratorium that states “if all your employees were able to telework during the pandemic and your business continued to operate, your business wasn’t suspended.”

On its website, Innovation Refunds writes, “The IRS expects 70-80% of SMBs are good candidates for taking the ERC.” In a statement to CNBC, the IRS said it “has not published estimates of the percentage of taxpayers expected to qualify for the Employee Retention Credit.”

A former contractor said that if a claim was “totally questionable” the tax attorneys would reject it but that very few of the applications that person oversaw were denied.  

CNBC also spoke with several Innovation Refunds customers who said they were enticed with large preapproval estimates from the company. In one instance, a potential customer was sent a preapproval notice for more than $300,000. The company gave these emails titles such as “Apply or Say Goodbye” and “Save your place in line” to encourage prospective clients to apply for the credit through Innovation Refunds.

But five of the 20 former employees and contractors CNBC spoke with spoke positively about their time at the company.

Innovation Refunds employees “pride themselves on being ultra conservative and compliant,” Domenico, the former executive vice president, wrote on LinkedIn after the IRS moratorium in September. He also told CNBC most of the company’s leads were “already enticed by the marketing” and many of the businesses initiated the outreach to Innovation Refunds as a result.

CNBC also spoke with a client who said applying for the ERC through Innovation Refunds was a “seamless” process. The client said they felt comfortable using the company because it had licensed and insured tax attorneys. 

“They did a good job,” the client said. “It was very smooth — I had continuous communication with a number of their employees.”

Many of the former employees and contractors CNBC spoke with said the company appeared to prioritize employee well-being and offered enticing bonuses — at least at first. 

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

Former workers described lavish large-scale events Innovation Refunds hosted for employees. For one holiday party, the company hired a marching band, had interpretation artists entertain guests and decorated the venue with Innovation Refunds-themed ice sculptures, three former employees said. 

“We saw a whole lot of use of capital in irresponsible ways,” the former employee said. “Hosting very large, extravagant parties, showering employees with all kinds of gifts.”

Many former employees and contractors told CNBC the allure of big bonuses and a strong pipeline of leads initially drew them to the job. But as time went on and potential clients began to dry up, the draw of bonuses turned into an empty promise, as many said there were not enough leads for the $100,000 to pan out. 

“We were working on recycled leads,” one former contractor said. “It got toward the end where people were complaining left and right because they were being called every day.”

Many former workers who spoke to CNBC said they feared losing their jobs as the company carried out several rounds of layoffs. Shortly after the IRS moratorium in September, Innovation Refunds abruptly laid off more than 40% of its staff and paused advertising, according to an internal memo CNBC reviewed.

Makler, often eager to take center stage before employees, spoke briefly on a Zoom call looking visibly affected, two former employees said. The company sent Slack messages to those who lost their jobs, and shuttered their computer access. Many received 30 days of severance.

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, according to a video recording of the exercise CNBC obtained. 

“We must look like a bunch of complete weirdos,” Makler said on the video.

The video shows dozens of employees standing in a circle outdoors, with Makler at the center of the circle explaining the practice. Makler then tosses a piece of paper into the fire.

“And with that, we can allow that energy to stay here so we can all get back to better things,” he said.

The IRS said it is now investigating a cottage industry that exploded onto the scene promoting the ERC program to small business owners, as well as investigating some businesses that filed for the credit.

The Department of Justice is now involved to pursue what the agency in its moratorium announcement called fraud that is “fueled by aggressive marketing,” without naming any individual companies.

The IRS, which had been warning businesses about potential scams related to the ERC for months, continued to update eligibility guidance for submissions for the program, which had been open since 2020, through the moratorium.

Across the industry, CPAs, attorneys and consultants have been raising red flags about the promotion of the ERC to small businesses who may not be eligible under IRS guidelines.

“The rules were completely getting tossed out the window,” Jenn McCabe, a partner at the accounting firm Armanino LLP who has been consulting with businesses on the credit, told CNBC.

The IRS has updated and clarified the program’s guidelines, but ineligible small businesses may have applied, with or without knowledge they were ineligible.

“I’m helping so many people determine if they were eligible a year after they’ve already banked the money, and that’s sad,” McCabe said.

If audited, small businesses that filed inaccurate claims could have to return the money they received — and may owe penalties on top of that.  

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

“I don’t know if I’ll ever know if it was done correctly on a case-by-case basis,” the former Innovation Refunds employee said. “But it makes me very queasy that people could be owing a lot of money back.”

ERC scams top the IRS’ “Dirty Dozen” list of potential tax schemes for 2023. The agency doesn’t name specific companies, but it lists “unsolicited calls,” ads mentioning an “easy application process,” and “fees based on a percentage of the refund amount” of the ERC as red flags. Many ERC promoters relied on such tactics during the marketing frenzy that unfolded.

“The promoters should be held accountable,” McCabe said. “They’ve trained huge sales organizations. They’ve set themselves up to be distanced from these mistakes. They’ve planned for this; they’re sophisticated.”

— CNBC’s Damita Menezes contributed to this report.