New IRS Commissioner Daniel Werfel previously said he would “commit to prioritizing” the processing speed of COVID-19 tax credits claimed via the Form 941 and 941-X employment tax forms, which have a current, combined IRS backlog of nearly 2.4 million, as of March 3, 2023.
On the same day as the U.S. Senate confirmed Daniel Werfel as IRS Commissioner, President Biden announced his Administration’s fiscal year (FY) 2024 budget that calls for a 15% increase in IRS funding to $14.1 billion after last year’s Inflation Reduction Act (P.L. 117-169) already granted $79.6 billion in funding to the Service.
Funding from IRS budget going to enforcement services
One of the provisions in the Inflation Reduction Act, signed into law by President Biden on August 16, 2022, allocates nearly $80 billion in funding to the IRS over a 10-year period. According to the nonpartisan Congressional Research Services (CRS), $45.6 billion of these funds are being distributed to IRS enforcement services. The report says that supporters of the funds claim it will help to reduce the “tax gap.”
In October 2022, the IRS reported that the estimated gross employment tax gap (consisting of non-filing, underreporting, and underpayment) was $93 billion (19% of the total $496 billion gross tax gap) for tax years 2014 through 2016.
Large amount of unprocessed Forms 941
Employers must file certain federal employment tax returns with the IRS that include Form 941 (Employer’s Quarterly Federal Tax Return). As of March 3, 2023, nearly one week before Werfel was confirmed as IRS Commissioner, and Biden announced his FY 2024 budget proposal, the IRS had 1.7 million unprocessed Forms 941. The Service continues to advise filers that it processes these tax returns in the order they are received and not to file a second return.
Notable backlog of adjusted employment tax returns, too
The IRS also has a backlog of 696,000 Forms 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund), some of which cannot be processed until the related Forms 941 are processed. The Service explains that these adjusted returns are being worked on at two sites with trained staff to process possible coronavirus (COVID-19) tax credits.
It is still possible for employers to adjust previously filed Forms 941 to amend, correct, or claim a COVID-19 tax credit, such as the employee retention credit (ERC) or paid sick and family leave credit, and Biden’s FY 2024 budget includes a provision that would increase the statute of limitation on COVID-19 tax credits.
New IRS Commissioner committed to improving ERC processing speed
By a Senate vote of 54 to 42, Daniel Werfel was confirmed as IRS Commissioner on March 9, 2023, and will now oversee the massive funding provided by the Inflation Reduction Act and possibly another $14.1 billion from Biden’s FY 2024 budget proposal.
A couple of weeks before his confirmation, Werfel was asked by Senators in its Finance Committee about the employee retention credit (ERC). Specifically, Senator John Cornyn (R-TX) asked about improving the processing speed for this pandemic-era tax credit claimed on Form 941. Werfel said he understood the importance of ensuring taxpayers receive tax benefits and would “commit to prioritizing this issue.”
TIGTA report noted processing delays that still exist
On August 31, 2022, a couple of weeks after Biden signed the IRA into law, the Treasury Inspector General for Tax Administration (TIGTA) issued a report that noted continued IRS processing delays prevented employers from receiving COVID-19 tax credits due to “a lack of updated programming and procedural guidance.”
As mentioned before, employers used Form 941 to claim COVID-19 tax credits and Form 941-X to make adjustments or corrections to these credits, which may include using this form to claim a tax credit if eligibility was not initially determined. TIGTA noted from its report, that on February 1, 2022, there were nearly half a million unprocessed Forms 941-X. Now, more than a year later, the total unprocessed Forms 941-X are just shy of 800,000.
More Forms 941 to be filed soon
Recently, the IRS issued a March 2023 version of Form 941 for use this year. The first quarter concludes at the end of this month with first quarter Forms 941 due by the end of April 2023. This means many more Forms 941 will be submitted and likely more Forms 941-X to follow if corrections or adjustments are needed.
Can the funding help clear the Form 941 backlog?
Can the nearly $80 billion in funding from the IRS and the $14.1 billion in proposed funding from Biden’s FY 2024 budget help to clear up the backlog? Back in late-August 2022, TIGTA recommended the IRS develop plans to prioritize processing backlogged claims, among other things. However, more than half a year later, the backlog of Forms 941-X continues to go in the wrong direction.
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