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Significant Amended Return Backlog Remains As IRS Issues Revised Form 941-X and Instructions

Christopher Wood, CPP  

· 5 minute read

Christopher Wood, CPP  

· 5 minute read

Now that tax filing season is over, IRS Commissioner Daniel Werfel expects the Service to increase the weekly processing of COVID-19 tax credits and look at additional ways to more "aggressively manage the backlog."

A little more than a week before the IRS issued a revised version of Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund), and its instructions, the IRS reported that there are nearly 1 million unprocessed amended employment tax returns.

Employers use Form 941-X to correct errors on a previously filed Form 941 for incorrectly reported wages, tips, and other compensation; income tax withheld from wages, tips, and other compensation; taxable Social Security wages; taxable Social Security tips; taxable Medicare wages and tips; and taxable wages and tips subject to Additional Medicare Tax withholding.

More recently, employers may also use a Form 941-X to claim certain COVID-19-era tax credits aimed to help both businesses and workers during the health emergency. This includes the deferred amount of the employer or employee share of Social Security tax, amounts reported on Form 941 for the credit for qualified sick and family leave wages, and the employee retention credit (ERC).

recent Treasury Inspector General for Tax Administration (TIGTA) report shows that although 95% of the total deferred Social Security tax has been paid, some 384,314 employers still owe the IRS approximately $6 billion in this payroll tax and will be subject to collection actions. Amended returns can be filed until 2024, which can impact the amount of the deferral and also the amount of the penalty for those employers that have not yet paid the deferred Social Security tax.

Other complications that may be impacting the IRS’s processing of Forms 941-X is the notable volume of ERC scams. The IRS has issued several warnings this past tax season about taxpayers falling for fraudsters promising “big money” with the ERC and lying about the employer’s eligibility. The scam even made the IRS’s 2023 “Dirty Dozen” list of tax scams.

As of May 17, 2023, the IRS stated that its total inventory of unprocessed Forms 941-X was approximately 879,000, some of which cannot be processed until the related 941s are completed. The Service explained that it works on this inventory in two sites (Cincinnati and Ogden) with trained staff to work any possible COVID-19 tax credits, such as the ERC.

Earlier in May, Senator Kirsten Gillibrand (D-NY) held a video press conference to demand that the IRS address its backlog of unprocessed employment tax forms, noting that she continues to hear from businesses in her state that have not yet received their ERC tax refunds for claims filed in March of 2021 for wages paid in 2020.

The IRS also has a Form 941 backlog of 2.1 million, as of May 18, 2023, which can only add to the delay in processing the Form 941-X backlog. New IRS Commissioner Daniel Werfel said that the IRS’s 10-year funding plan will include more digital scanning of forms that include Forms 941 to help expedite processing.

He recently stated this in an April 27, 2023 Ways and Means Committee hearing on accountability and transparency, where Werfel said the Service aims to scan more than one million forms this year. “We are getting healthier,” the 50th IRS Commissioner said during the hearing regarding the Service’s operational improvements since the COVID-19 pandemic. “The paper piled up…such as the employee retention credits,” Werfel added.

Werfel noted that the IRS had been processing about 20,000 ERC credit claims per week, “but that was not enough to keep up with the demand because more come in” and stated that there is still ERC eligibility through 2025. “This is a growing target, not a stable one,” he explained, but said that since tax filing season is over, the IRS aims to double the rate of processed claims from 20,000 to 40,000 or more.

“Plus, we have teams looking at ways we can improve the process and be more aggressive to manage that backlog,” he said, referring to the unprocessed Forms 941 and 941-X containing ERC or other COVID-19 tax credit information. “It is an absolute priority,” Werfel assured the Committee during the hearing.

The April 2023 revised version of Form 941-X, issued by the IRS on May 25, 2023, is similar to the draft version of the form and instructions that the Service posted earlier this month and in April (see IRS Issues 2023 Draft Form 941 -X With Minor Changes As Backlog Continues to Grow, 04/20/22; and IRS Releases Draft of 941 -X Instructions, Updates Payroll Tax Credit Information, 05/08/22). The return must still be filed on paper. Whether the IRS funding will make an electronic filing option for Form 941-X in the future remains to be seen.

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