How Innovation Refunds cashed in on the Employee Retention Credit

How Innovation Refunds cashed in on the Employee Retention Credit

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.

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. 

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.”