As the IRS continues to chip away at its notable backlog of unprocessed employment tax returns and amended returns, the Electronic Tax Administration Advisory Committee’s (ETAAC) released its annual report to Congress with suggestions to the Service for prioritizing the e-filing of employment tax returns and enhance the duplication submission process.
Pandemic tax credits complicated return processing.
During the COVID-19 pandemic, the federal government enacted legislation to help both employers and employees. Some of these provisions included tax credits, such as the employee retention credit (ERC). The ERC is reported on Form 941, Employer’s Quarterly Federal Tax Return, and amendments or corrections to previously filed Forms 941 are accomplished by submitting Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
The IRS has had a significant backlog of both Forms 941 and Forms 941-X for some time. The ETAAC’s report cited an April 12, 2023 figure showing 961,000 unprocessed Forms 941-X. As of June 21, 2023, that number has been reduced to 437,000. On the IRS’s webpage describing the status of mission-critical operations, the Service explains that some Forms 941-X cannot be processed until the related Form 941 is completed. Fortunately, the Form 941 backlog is at 37,000, as of June 22, 2023.
IRS focusing more on unprocessed returns.
Since the end of the 2023 tax filing season for 2022 tax returns in mid-April 2023, the IRS has been able to focus more resources on its inventory of employment tax returns. IRS Commissioner Daniel Werfel has previously stated that clearing the backlog of these employment tax returns “is an absolute priority.” He noted that the IRS’s processing of 20,000 ERC claims per week was not enough to keep up with the continued volume and added that there is still ERC eligibility through 2025.
Paper is the only option for amended returns.
Another issue with processing speeds for Form 941-X is that the form can only be submitted on paper. The IRS’s 10-year funding plan aims to include more digital scanning of forms that include Form 941 to help expedite processing. Werfel stated that the Service intends to scan more than one-million forms in 2023.
IRS and ETAAC agree to reduce/eliminate paper filings.
According to the ETAAC’s report, the goal of the IRS is to reduce or eliminate all paper filings. The ETAAC said it agrees with the goal as it will streamline and accelerate the processing of all taxpayer returns and commended the IRS for reducing the electronic filing threshold to 10 forms for most information returns (including Forms W-2 and 1099 series) effective for all returns filed after December 31, 2023. The Social Security Administration’s (SSA) semi-annual meeting with the wage reporting community on June 1, 2023 included a representative from the IRS discussing this upcoming e-filing change.
ETAAC recommends e-filing option for employment tax returns.
As such, the ETAAC recommends that Congress introduce a similar regulation for employment tax returns, specifically Form 941, to increase electronic filings and reduce the processing backlog. The report noted a recent IRS tax tip that includes a mobile-friendly way to file Forms 940, 941, and 944, commented on it being a step in the right direction, and offered to provide feedback or participate in user-testing for the new capability.
Employment tax returns have highest paper filings.
According to the IRS, employment tax returns have the highest percentage of paper filings, showing that nearly half (49.7%) of Forms 941 were filed on paper in 2021. Currently, the only way to e-file a Form 941 is directly from software to the Modernized eFile (MeF) IRS server system in XML format, which the ETAAC believes limits the possibility for many businesses to file electronically.
New portal by 2024.
Since the ETAAC said it takes the IRS, on average, six months to process amended returns, it recommends the IRS develop an electronic option to speed up processing and address other problems in the paper process. By January 1, 2024, the ETAAC recommends the IRS provide a portal for filers to upload original and amended employment tax returns electronically. Further, the report suggests the IRS create a line-by-line input similar to the current process available through the SSA’s Business Services Online (BSO) for Forms W-2, Wage and Tax Statement. In addition, the report requests the IRS create a way to download and automatically upload a Form 941 image (i.e., PDF) to the IRS system.
Automate duplicate Form 941 process.
The ETAAC’s report also recommends the IRS enhance and automate its current mechanism for determining which return to process when duplicate quarterly Forms 941 are submitted. For example, when a taxpayer files two returns for the same quarter due to a client terminating their payroll processor mid-quarter, both processors file Form 941 returns for the amounts reported, which could lead to the overstatement of deposits and liabilities.
Although the IRS already has a process to review duplicate submissions, the ETAAC thinks that the Service might be able to eliminate human intervention by implementing automated business rules to determine which return to process. In cases where the system is not able to determine which return to process, the IRS can reach out to the taxpayer via their online account to specify which return to process.
ETAAC suggests the IRS create a history record table to show each filing, filing date, and the user that filed each return, creating a unique record locator with a linked image of the filing, which will help the taxpayer easily and quickly determine the correct return.
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