Hedge Funds Cash In on Covid-Era Tax Credit With IRS Backlog

In a twist that most asset managers could only dream of, investment funds are reaping profits through the Internal Revenue Service.

(Bloomberg) — In a twist that most asset managers could only dream of, investment funds are reaping profits through the Internal Revenue Service. 

Marblegate Asset Management and Brevet Capital Management are among firms buying some of the tax refunds that thousands of businesses have yet to receive through the $2.2 trillion pandemic stimulus package. Owl Creek Asset Management and a George Soros-backed fintech firm are also financing advances for the employee-retention credit, which Congress designed to keep wages flowing in early 2020.

The IRS has been inundated with retroactive refund requests since Congress broadened their availability in 2021, and after self-described experts unleashed an ad blitz touting their ability to help businesses get the credits. 

After finding many claims ineligible or even fraudulent, the IRS issued its latest warning on employee-retention scams last week and is taking the unusual step of scrutinizing refund requests before paying up. Investment firms have capitalized on the ensuing logjam by providing advances to employers that need capital now.

“There is more of a marketplace when the IRS is taking longer,” said Lou Gonzalez, chief executive officer of Valiant Capital, which has originated as much as $200 million in advances for fund managers. “People realize, ‘I can’t wait 10 months.’”

Companies that were ordered to close during the pandemic can claim as much as $26,000 for each job they kept during the shutdown. Those that continued cutting paychecks while losing significant business during Covid-19 may also be eligible.

Investors generally advance the funding by purchasing claims from employers at 80 to 90 cents on the dollar. When and if the IRS pays the claim, the employer sends the full amount to the fund. Should the IRS deny or reduce the refund, the employer typically has to make up the difference.

Marblegate and Brevet declined to comment. Owl Creek and Soros didn’t reply to messages seeking comment.

Four Players

Owl Creek, a distressed and event-driven investor, raised about $24 million for its employee-retention credit fund in February, according to a filing. Marblegate, principally owned by Andrew Milgram and Paul Arrouet, provides advances on the credits, as does Douglas Monticciolo’s Brevet Capital, according to filings and three people in the industry.

A fourth provider, Raistone, specializes in purchasing unpaid business invoices from companies, a practice known as accounts receivable financing. The firm expanded into employee-retention claims as IRS delays became more prolonged.

“For us, it was a natural evolution,” Raistone CEO Dave Skirzenski said in an interview. “We saw an opportunity to accelerate the ERCs to the small businesses to get them working capital.”

Raistone, described on its website as “the nation’s leading ERC financier,” arranges funding from dozens of institutional investors, Skirzenski said, without providing any specifics. 

Soros’s family office holds an equity stake in Raistone and has helped finance its traditional accounts receivables business, according to filings and the company’s website. There’s no indication in filings that Soros financed the employee-retention credit business.

Valiant Capital and its peers, for their part, play a role similar to mortgage brokers by connecting lenders with customers that want their money right away instead of waiting for the IRS. Valiant, for instance, scrutinizes claims for eligibility under the 170-plus pages of guidance for the credit and then makes recommendations to firms that provide financing.

The credits gained in popularity after a rule change in 2021 that expanded the number of eligible employers and increased the maximum amount they can claim. As of early March, the IRS had paid almost $153 billion of employee-retention credits since the program began, according to agency data. 

“Suddenly the amount of businesses that were eligible ballooned,” said Ahron Golding, a tax attorney at accounting firm Roth & Co. And the IRS “was under a lot of pressure from Congress to issue these credits.”

In March, the IRS warned that some promoters made “offers too good to be true” and added the scams to its “Dirty Dozen” list of frauds. The heightened scrutiny has exacerbated wait times.

As of May 10, the IRS had a backlog of 938,000 forms filed to claim payroll tax refunds — mostly consisting of the employee-retention credits. That number tripled over the past year. The refunds can take as little as two months or as long as two years, said Kenneth Dettman, CEO of EZ-ERC, which helps clients properly document and file for the credits.

IRS Commissioner Danny Werfel told Congress in April that the agency will devote more resources to processing such claims, with a goal of doubling the 20,000 the agency handles each week. As long as the delays persist, investment firms will profit from the credits.

“Advance funding for some of these businesses is a lifeline right now,” said Dettman, whose firm no longer offers financing to clients who are filing for the tax refund. “It can be expensive from an interest rate perspective, but sometimes it’s the only remaining option for some of these taxpayers.”

–With assistance from Steve Dickson.

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