IRS delays caused employers to wait on needed COVID tax credit relief

TAX ALERT | September 08, 2022

Authored by RSM US LLP

IRS processing delays result in extended wait for employers seeking covid-19 tax credits

The Treasury Inspector General for Tax Administration (TIGTA) released a report dated Aug. 31, 2022, which found continued processing delays prevented businesses from timely receiving pandemic-related tax credits obtained by filing on amended employment tax returns or Forms 941-X. The various pandemic-related benefits for employers are provided by the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief and Economic Security (CARES) Act, legislation passed on Mar. 18 and Mar. 27, 2020, respectively. 

Employer benefits provided by FFCRA and CARES Act

FFCRA and the CARES Act provide employers with three new tax credits – the Sick Leave Credit, the Family Leave Credit and the Employee Retention Credit (ERC). These credits apply to certain qualified employee wages paid in parts of 2020 and 2021. The sick and family leave credits under the FFRCA are refundable credits, meaning that they are reimbursed to the employer, even if they do not have a tax liability to take the credit against. 

The ERC under the CARES Act is equal to 50% of qualified wages paid between Mar. 31, 2020 and Dec. 31, 2020 and 70% of qualified wages paid between Jan. 1, 2021 and Dec. 31, 2021. The ERC is subject to a limitation of $10,000 in qualified wages per affected employee. This credit is also a refundable credit. 

Subsequent legislation extended the period for sick and family leave credits to apply to wages paid through Mar. 31, 2021 and the ERC through June 30, 2021. Additional legislation, the American Rescue Plan Act, provided additional employer tax credits similar to those provided under FFRCA and the CARES Act, which apply to periods through Sep.30, 2021 and the ERC through Dec. 31, 2021. However, the Infrastructure Investment and Jobs Act, signed into law on Nov. 15, 2021, retroactively limited the availability of the ERC, taking away the ERC for all companies other than certain “recovery startup businesses” for wages paid in the fourth quarter of 2021.

Employer access to Pandemic-Related Employment Tax Relief Limited by IRS Failure to Process Amended Forms  

Employers generally access these credits by claiming them on Forms 941, Employer’s Quarterly Federal Tax Return. Employers who did not claim these credits on their originally filed Forms 941 are able to claim them by filing amended returns or Forms 941-X. Because of the timing of the various legislative provisions detailed above, the IRS has experienced a large increase in the Forms 941-X being filed to claim the tax credits after their initial Form 941 filings. According to the TIGTA report, these amended returns have been subject to ongoing and considerable processing delays. 

The report finds that as of Feb. 1, 2022, there were 447,435 Forms 941-X waiting to be processed. Over 90% of those Forms 941-X were waiting for over 45 calendar days; 13.6% were waiting over 180 calendar days.¹  Furthermore, the IRS did not immediately begin processing Forms 941-X containing these claims. The report found that the IRS did not begin routinely processing amended returns containing sick and family leave credits and the ERC for 12 months after the legislation was enacted.

A prior TIGTA report issued in July 2021 raised concerns regarding the potential for fraudulent claims of employer tax credits being claimed on Forms 941. The August 2022 TIGTA report finds that the IRS took corrective actions to identify and prevent some of these claims, including updating identity theft fraud filters to identify suspicious Forms 941 based on certain unspecified criteria. The IRS also took steps to identify erroneous employer tax credit claims associated with ineligible government entity employers which led to a reversal of $124 million in erroneous credits as of March 2022. In taking these fraud prevention steps, the report suggests that the IRS selected a substantial number of ERC requests for special processing, which may have further delayed some refunds.

TIGTA finds IRS justifications for delays inadequate

TIGTA notified IRS management of its concerns regarding suspension of IRS processing of Forms 941-X that contained pandemic related credits on more than one occasion. IRS management cited the need to develop new procedures and programming issues associated with processing the claims. While TIGTA acknowledged that the IRS was tasked with updating its processes several times due to the numerous legislative changes, it did not ultimately agree that those changes justified the lengthy delays employers are still experiencing in the processing of Forms 941-X. The TIGTA report takes issue with the fact that steps were not taken earlier to prioritize the backlog of Form 941-X claims. The delays in processing and the significant backlog have prevented businesses from receiving the benefits intended to provide immediate relief to employers. 

The TIGTA report concludes that while procedural updates and programming issues contributed to processing delays, the lack of trained staff and erroneously suspended Form 941-X claims were also contributing factors to the processing delays. For example, the IRS issued procedures for processing Forms 941-X with pandemic related tax credits on Dec. 11, 2020 but did not provide training to employees until Mar. and April 2021. Due to this delay in training and additional programming issues identified, the IRS did not begin continuously processing these claims until July 2021. In addition, the report found that a number of Forms 941-X were suspended from processing erroneously and those claims had an average processing time of over 6 months. 

TIGTA recommends IRS prioritize claims processing and closely review ERC Claims

TIGTA recommended that the IRS review the suspended Forms 941-X for erroneous suspensions. The IRS responded that it had implemented additional reviews of suspended inventory to evaluate whether cases were suspended incorrectly. The IRS reported that as of July 8, 2022, it had 76,079 Form 941-X claims suspended that need to be processed. TIGTA also recommended the IRS develop specific plans to prioritize claims and develop timelines for processing backlogged claims. The IRS agreed with the recommendation and stated that it has continued its effort to reduce inventory efforts from the pandemic through increased staffing with overtime and 100% of campus employee time focused on paper inventory. 

TIGTA and IRS have agreed that the IRS will more routinely send ERC applications that meet certain referral criteria to IRS Examination. The IRS will also more closely review the small number of Recovery Start Up ERC requests for ineligibility.

1 Based on industry experience, the delays are often considerably longer than these reported averages.