A few days before the IRS issued an April 2023 draft version of Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund), with minor changes from the current version, the IRS reported a backlog of nearly one million unprocessed Forms 941-X.
Form 941-X is used to correct errors on a Form 941 that an employer previously filed, which may include employment taxes and tax credits. Specifically, COVID-19 tax credits such as the employee retention credit (ERC) and credit for qualified sick and family leave wages.
The IRS explains that an underreported employment tax credit or Social Security tax deferral should be treated like an overreported tax amount; and an overreported employment tax credit or Social Security tax deferral should be treated like an underreported tax amount.
The IRS’s current version of Form 941-X and its instructions were issued in April 2022. The April 2023 draft Form 941-X does not contain significant changes from the current version in effect. The draft form contains a cover page with a note from the IRS stating that it does not release draft forms until the IRS believes it has incorporated all changes. However, if unexpected issues arise, the IRS will post a new draft of the form to alert taxpayers that changes were made to the previously posted draft.
An ongoing issue for the IRS has been the backlog of unprocessed Forms 941-X. As of April 12, 2023, the IRS’s total inventory of unprocessed Forms 941-X was approximately 961,000. The IRS explains that some of these forms cannot be processed until the related Forms 941 are processed. The IRS’s backlog of unprocessed Forms 941 is at 150,000, as of April 13, 2023, which may be promising news that the nearly one-million unprocessed Forms 941-X will be getting more attention.
Part of the IRS’s 10-year funding plan from the nearly $80 billion earmarked for the IRS in the Inflation Reduction Act of 2022 includes the digital scanning of more paper forms to help accelerate the process. Forms 941-X can only be submitted on paper at this point. New IRS Commissioner Daniel Werfel promised “even more” digital form scanning in the next filing season to help eliminate paper form backlogs.
The IRS notes that although not all unprocessed Form 941-X returns involve a COVID-19 credit, there are trained staff to work any possible credits at its Cincinnati and Ogden sites. 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 ERC or credit for paid sick and family leave wages.
President Joseph Biden’s fiscal year 2024 budget includes a provision that would increase the statute of limitation on COVID-19 tax credits, indicating the IRS will continue to scrutinize the use of these credits. For the 2022 tax filing season, the IRS added ERC fraud to its annual “Dirty Dozen” list of tax scams and a director at the IRS warned taxpayers to “think twice” before claiming the ERC on a Form 941-X as the Service is “actively auditing and conducting criminal investigations” relating to claims that are more frequently turning out to be false.
See Payroll Guide ¶4225 and Payroll Guide ¶4275 for more information on Forms 941 and 941-X.
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