ERC Newswire

By ERCbee, November 17, 2022

 On August 31, 2022, the Treasury Inspector General for Tax Administration (TIGTA) released a report that soberly outlined, in great detail, the many internal gaps and failings that contributed to the IRS’s deep backlog of pandemic-related relief benefit payouts covered by the CARES Act, including the Employee Retention Credit (ERC) that so many American business owners are still eagerly awaiting receipt of. 

Despite revealing the true depth of the IRS’s systemic weaknesses that prevented it from being able to process, pay, and enforce these emergency assistance programs in a timely manner — along with a wild discovery that potentially trillions of dollars of the allocated funds have been claimed by ineligible or outright fraudulent parties — this report has mostly flown under the radar. 

Given the immense volume of U.S. companies that have a stake in the game here, it’s important for all small-to-midsize business owners and employers who qualify for the ERC to understand the scope, key takeaways, and consequences of this most recent report and how all of the above may impact their ERC refund.

THE REPORT’S PURPOSE 

As a continuation of an earlier report (released July 2021, approximately 16 months after the CARES Act was signed into law with the intention of offering small-to-midsize businesses the emergency relief funds needed to navigate grueling economic pressures caused by the pandemic), the TIGTA did another deep dive into the bureau’s business tax provisions for pandemic-related benefits and internal systems for processing them efficiently. 

According to the report, the goal of this newest review was to “assess the IRS’s processes and procedures to ensure the accuracy and validity of COVID-19 related employer tax credits on original and amended tax returns.” 

At first glance, that mission statement can read as though the TIGTA is simply trying to protect against fraud, warn bad actors, and ensure there are effective systems in place for flagging erroneous claims. While an egregious amount of potentially fraudulent and/or ineligible claims were, indeed, identified in the report, the true takeaways were much more pointed at the IRS, itself, addressing (1) the significant backlog of unprocessed claims, (2) the lacking internal systems and protocols that contributed to the delays, (3) the insufficient excuses made by IRS management when confronted with those gaps, and (4) nine urgent recommendations for improvement.

THE KEY FINDINGS

The report opens by admitting that the IRS didn’t begin processing qualified ERC claims until 12 months after the legislation was first enacted due to “a lack of updated programming and procedural guidance … [along with] a lack of training, erroneously suspended claims, and a lack of prioritization of claims contributed to additional delays processing claims.” It went on to reveal that an absence of review, referral, and verification protocols contributed to the extensive delay and enabled $45 million worth of “potentially erroneous” non-refundable employer tax credits to pass through the system unmonitored.

Specifically, the TIGTA and IRS flagged 11,096 suspicious returns claiming more than $2 trillion in ERC refunds as of March 2022 — and revealed that 7,400 ineligible government entities were allowed to claim $124 million of the allocated funds. A more recent update from the IRS revealed that, as of November 2, 2022, 2.5 million Forms 941 (the tax form containing the ERC) and 264,000 Forms 941-X (the amended tax return form that makes it possible to retroactively claim the credit and other COVID-19 relief provisions) were still waiting to be processed. For the latter, this marks a slight improvement from earlier estimates, which reported that 447,435 Forms 941-X were unprocessed as of February 2022. Since truly qualifying businesses are still allowed to submit amended tax returns to retroactively claim their credit, this figure will likely continue to shift up and down as over-aged filings are cleared out from the queue while new claims pour in.

It’s worth noting that, unfortunately, many of these oversight failings and internal delays trickled down and snowballed from the very moment the legislation was signed. While the benefit was intended to incentivize and reward resilient businesses for carrying on full steam ahead with staff at the height of the pandemic, its immediate implementation fell smack dab in the middle of the 2020 tax season – when countless filings were already being processed and while the IRS was navigating the implications of the global health crisis on its own staff and systems. 

As evidenced by Figure 4 of the TIGTA report, the IRS’s processing sites were “awaiting issuance of procedures for processing claims” for seven full months and were advised to halt all processing of ERC claims from October 28, 2020 to December 11, 2020 while new review procedures were developed. Despite the IRS issuing those approved procedures at the top of December 2020, its processing sites did not begin reviewing claims until March/April of the following year (we, too, are wondering what might have happened in that quarter-long gap to cause such a delay). These were just the first of multiple other processing pauses that occurred to date, of which the TIGTA repeatedly tried to relay their concerns to the bureau.

THE RECOMMENDATIONS & IRS RESPONSE

After summarizing the corrective actions the IRS already implemented following the TIGTA’s July 2021 report (namely, the updating of existing fraud filters to identify suspicious filings and a series of review procedures for flagging non-eligible government entity applicants), nine recommendations were made, including the prioritization of backlogged claims processing and the development of procedures that escalate amended filings that meet referral criteria to Examination for review. Of those nine TIGTA recommendations, the IRS agreed to eight. Their excuse for rejecting the ninth recommendation did not appease the TIGTA, however, who stated, “The IRS’s subsequent reviews do not address the concerns identified in our report. Accounts Management employees cited unclear guidance and training as to why 73% of claims were not referred when required.” 

The IRS has since added the growing backlog for Forms 941 to its list of mission-critical functions. Whether that prioritization was done in response to the TIGTA report or as an internal systemic solution to an unsustainable backlog is unclear. At about that same time, the President allocated nearly $80 billion in new funding for the IRS through the Inflation Reduction Act (IRA), with $45.6 billion of the budget ear-marked for the processing and enforcement of the ERC, among other things.

WHAT THIS MEANS FOR YOU

Ultimately, the TIGTA’s report faults the IRS for most/all of the factors contributing to the significant delays and backlog of unprocessed, overdue pandemic relief benefits. Before listing their nine fix-it recommendations, the TIGTA first shone a critical light on the many excuses IRS management made (none of which the TIGTA agreed could justify such extensive delays) and stated that “the IRS did not begin prioritizing amended employment tax returns with COVID-19 related employer credits or tracking the processing of the backlog of suspended Forms 941-X for eight months after procedures to process the amended employment tax returns were available.” Talk about bringing out the receipts.

So, what does this mean for you? If you are a qualifying business owner or employer who has filed for the ERC (or still plans to), it means that you can expect a delay in the processing of your credit, at least in the near-term, as the IRS doubles down on emptying out the backlog. It also likely means that your tax return will pass through more checks and balances to verify that it is valid, with some filings being flagged for an audit – which is why it is very important to ensure you have the proper CPA, ERC expert team and/or legal oversight necessary to produce a fully-qualified, compliant claim. But it also means that the wheels are now finally fully in motion to get your ERC check to you as soon as possible, with additional IRS personnel, programs, and processes actively being implemented through the IRA budget to ensure you are paid for the part you played in keeping America running throughout one of the most challenging times in recent history. Better late than never? Well, one can hope.