Published June 5, 2023
In a surprising twist, investment funds have found a profitable opportunity by leveraging the Internal Revenue Service (IRS). Prominent firms like Marblegate Asset Management, Brevet Capital Management, Owl Creek Asset Management, and a fintech company backed by George Soros are purchasing tax refunds that many businesses are still awaiting from the $2.2 trillion pandemic stimulus package. Furthermore, these firms are offering advances for the employee-retention credit, a measure introduced by Congress to ensure the flow of wages in early 2020.
Surging Demand for Refunds and IRS Scrutiny
The expansion of retroactive refund requests by Congress in 2021 has led to a significant increase in demand. Self-proclaimed experts, through an aggressive advertising campaign, have claimed to help businesses secure these credits. Consequently, the IRS has been overwhelmed with a multitude of ineligible or fraudulent claims. In response, the IRS recently issued a warning about employee-retention scams and has implemented a thorough review process for refund requests before releasing funds. Investment firms have seized this opportunity by providing advances to employers in need of immediate capital.
Lou Gonzalez, the CEO of Valiant Capital, a firm that has facilitated advances of up to $200 million for fund managers, remarked, “When the IRS is taking longer”, there is a more active marketplace. People realize they can’t afford to wait for 10 months.
Eligibility and Funding Process
Companies ordered to close during the pandemic can claim up to $26,000 for each job they retained during the shutdown. Businesses that continued paying wages despite significant losses are also eligible for these credits. Investors typically offer funding by purchasing claims from employers at 80 to 90 cents on the dollar. Once the IRS approves the claim, the employer sends the full refund amount to the fund. However, if the IRS denies or reduces the refund, the employer is responsible for covering the shortfall.
Firms Involved and Expansion into Employee-Retention Claims
Notably, Marblegate, Brevet, Owl Creek, and the Soros-backed fintech company have chosen not to comment on their involvement in these ventures. Owl Creek, primarily focused on distressed and event-driven investments, raised approximately $24 million for its employee-retention credit fund in February. Marblegate, owned by Andrew Milgram and Paul Arrouet, and Brevet Capital, led by Douglas Monticciolo, also provide advances on these credits, as revealed in filings and information from industry insiders. Another player, Raistone, specializes in accounts receivable financing by purchasing unpaid business invoices. As delays at the IRS have persisted, Raistone has expanded its operations to include employee retention claims.
Dave Skirzenski, the CEO of Raistone, explained, “For us, it was a natural evolution.” They recognized the opportunity to expedite ERCs for small businesses in need of working capital. Raistone, known as “the nation’s leading ERC financier” on its website, arranges funding from numerous institutional investors, though specific details are not provided.
Increased Popularity and IRS Scrutiny
The popularity of these credits surged following a rule change in 2021 that expanded eligibility criteria and increased the maximum claimable amount for employers. According to IRS data as of early March, nearly $153 billion in employee-retention credits had been paid since the program’s inception.
Ahron Golding, a tax attorney at Roth & Co., emphasized the number of eligible businesses suddenly ballooned, and Congress exerted considerable pressure on the IRS to issue these credits.
In March, the IRS warned about fraudulent promoters offering unrealistic promises and added such scams to its list of fraudulent activities. This heightened scrutiny has contributed to longer wait times. As of May 10, the IRS faced a backlog of 938,000 forms filed for claiming payroll tax refunds, predominantly consisting of employee-retention credits. This number has tripled over the past year. The processing time for refunds can vary from as little as two months to as long as two years, as stated by Kenneth Dettman, CEO of EZ-ERC, a company assisting clients in documenting and filing for these credits.
IRS Response and Future Profits
IRS Commissioner Danny Werfel informed Congress in April that the agency would allocate additional resources to process these claims, with a goal of doubling the weekly handling capacity from 20,000 claims. However, as long as delays persist, investment firms will continue to profit from these credits.
Dettman highlighted the significance of advance funding for businesses, stating for some of these businesses, it is a lifeline right now. While it may be costly in terms of interest rates, it is often the only remaining option for these taxpayers.
Source: Hedge funds cash in on COVID-era tax credit with IRS backlog. Miles Weiss, Accounting Today.
