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Form 1040 “800-Pound Gorilla” When It Comes to Employment Tax Modernization, Legal Expert Says

Christopher Wood, CPP  

· 6 minute read

Christopher Wood, CPP  

· 6 minute read

A former Associate Tax Legislative Counsel at the Treasury Department said the Form 1040 individual income tax return is the “800-pound gorilla” in the room in terms of IRS priorities for modernizing returns, leaving Form 941-X, used for adjusting and correcting payroll taxes, jockeying for attention.

Form 1040 is used by U.S. taxpayers to file an annual income tax return. According to the IRS’s 2022 Data Book, 160,571,367 individual tax returns in the Form 1040 series were filed this tax season. Of those returns filed, 150,605,162 were submitted to the IRS electronically. As such, nearly 95% of the forms in the 1040 series were e-filed.

On the employment tax side, the IRS received 31,180,674 returns from employers, including Forms 940, 941, 943, 944, 1042, and 941-X. However, when it comes to the electronic filing of these returns, only 18,962,588 were sent to the IRS electronically, meaning that just a little more than 60% of employment tax returns were e-filed for the 2022 filing year.

“This is not the fault of the IRS,” Rochelle Hodes, Principal at Crowe LLP’s Washington National Tax Office, began. “This is a challenge of our tax system.”

Hodes recalled her experience with the government, both as an employee and in private practice, when the IRS first began using e-filing with magnetic media tapes for information reporting and transitioning to file submissions through the FIRE (Filing Information Returns Electronically) system. But, in her experience and observations regarding the tax system, the main focus has not been on the information return or employment tax side.

“So, in all of that time, the prioritization has been around the [Form] 1040 space.” Hodes noted, “Even though with employment taxes, there’s like a ton of employers, and they, in turn, affect so many individuals, the way [the IRS] prioritizes is based on this 800-pound gorilla sort of attracting all the attention.”

Hodes also believes that COVID-19 pandemic tax credits, like the employee retention credit (ERC), Social Security tax deferral, and paid family and medical leave credit, have “really highlighted for the IRS, how they have not put the right input” on the areas of employment and payroll taxes, among other areas. The tax credits offered to help employers and employees during the height of the health emergency were primarily reported through employment tax forms like Form 941 and adjusted/corrected using Form 941-X.

A COVID-era provision permitted employers to defer the employer’s share of Social Security tax on employees wages subject to the wage base limit. Hodes shared a recent discussion with a colleague on an issue for this COVID-era provision where the colleague told her of a few instances where an employer paid the deferred amount timely for the quarters the taxes were deferred in a year with one check. However, the IRS ended up crediting the Social Security tax for the first quarter, refunding the employer for the remainder, and ultimately issuing penalties for the other quarters where the tax was due as if payments had not been submitted timely.

“Now, this is not required by statute,” Hodes started. “This is an IRS system thing.” Hodes said her colleague noticed several of these instances where a better process or system could have identified that the payment was for the full amount of deferred Social Security tax due.

Hodes then pivoted to Form 941-X and its backlog. According to the IRS website, there are 979,000 unprocessed Forms 941-X as of April 19. Some of these returns cannot be processed until the related Forms 941 are completed (148,000 unprocessed as of April 19). “Everything just sat because [the IRS] did not have the training or the manual instructions for their people on how to implement these credits and special provisions for employment tax,” Hodes stated.

The IRS does note that it now has two locations (Cincinnati and Odgen) with trained staff available to work on Forms 941-X with COVID-19 adjustments/corrections as needed. However, the backlog of Forms 941-X has increased since the last update earlier in April. Hodes provided an example where she has been working on correcting a taxpayer error on Form 941-X since 2021. “I think we are just about set up to fix it all,” she added regarding the amount of time it took to get the correction processed.

In addition to navigating the complicated COVID-19 tax credit reporting, adjustments, and corrections, another issue is that Form 941-X can only be filed on paper. In its funding plan, the IRS details how digital scanning will be more of a priority to assist in speeding up processing times with certain forms. New IRS Commissioner Daniel Werfel, who testified before the Senate Finance Committee on April 19 regarding the tax filing season and the IRS budget, described this new initiative called “Digital Intake” and noted how the IRS scanned more than 410,000 paper Forms 940 since the start of 2023. He added that the IRS expanded this effort in March to include Form 941 and says the IRS “hopes to scan more than a million forms this year.”

A provision in the Inflation Reduction Act of 2022 earmarked nearly $80 billion in funding for the IRS. In early April, the IRS issued its 10-year plan for the money, which mentions employment taxes and forms like the 940 and 941. With regard to if the funding can help reduce processing backlogs, like with the Form 941-X, Hodes said “it depends on the focusing” and came back to her initial point on the subject, “our 800-pound gorilla,” the Form 1040.

Hodes noted that the IRS is hiring more people, “focusing on…calls,” and said that there is a special phone number to call for taxpayers having issues with Social Security tax deferral payments. “So, hopefully, more employees means more people trying to fix the glitches, trying to help people work through this stuff,” Hodes said. She added that in her experience many of the mistakes in employment taxes have to do with applying information incorrectly in the various lines and boxes. The March 2023 version of Form 941 has 28 lines and the current Form 941-X (IRS has only a draft Form 941-X for April 2023 at this point) contains 43 lines.

“That’s a lot of what the mistakes are,” Hodes began. She added that because reporting is on a quarterly and annual basis, and there can be so many employees in a payroll system, “[errors can be] an everyday thing.”

Hodes is hopeful that increased IRS staffing will help with employment tax issues and “should smooth things out significantly” but ultimately it “depends on the priorities that the IRS selects.”


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