In its annual report to Congress, the National Taxpayer Advocate (NTA) said it was “very concerned” about delays in processing employee retention credit (ERC) claims during the 2024 filing season (IR 2024-07).
The ERC is a refundable tax credit for certain eligible businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic (see Payroll Guide ¶20,905). Although the credit eligibility period closed for all employers at the end of 2021, the IRS continues to be inundated with ERC claims via Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
Due to the number of dubious ERC claims the IRS has said it receives, it froze the processing of any new ERC claims in September 2023 and offers taxpayers a withdrawal program and a temporary voluntary disclosure program to help those who may have made a claim in error.
The annual NTA report explains that taxpayers have had difficulties in determining eligibility for the ERC since it first began and the IRS has struggled to stay on top of claims because of both the volume and complexity of the law, which led to a number of scams encouraging businesses to claim the credit regardless of eligibility.
Backlog of unprocessed claims
As of September 28, 2023, Taxpayer Advocate Service (TAS) research estimates that the IRS had processed more than 3.5 million ERC claims filed on original and amended Forms 941, Employer’s Quarterly Federal Tax Return, 943, Employer’s Annual Federal Tax Return for Agricultural Employees, and 944, Employer’s Annual Federal Tax Return, with approximately $230 billion in credits being paid out (the Congressional Budget Office estimated ERC claims would only cost the government $85 billion).
TAS research also points out that there still remains a significant backlog of unprocessed Forms 941-X (nearly 1.06 million as of December 9, 2023), which can be used to claim the ERC until April 15, 2024 for 2020 claims and April 15, 2025 for 2021 claims. The report states that at the end of fiscal year (FY) 2023, 95% of the unprocessed Forms 941-X, which can only be submitted via paper, contained claims for the ERC.
Inventory dynamics “rapidly” changing
Although the report admits that more than 86% of the unprocessed claims were less than 120 days old at the end of FY 2023, the NTA warns that the “dynamics of this inventory are changing rapidly.” For example, from mid-August through mid-October 2023, taxpayers filed ERC claims at an average weekly rate of approximately 45,000, while IRS processing of these claims slowed to an average weekly rate of just 150.
Should this rate continue, the NTA states that the IRS will carryover almost 1.3 million ERC claims into the 2024 filing season. The report voices serious concern that with the Treasury Department’s continued commitment to deliver an 85% level of telephone service, including during the busy filing season, the IRS will not begin working on the majority of these claims until after the close of the 2024 filing season.
NTA recommends ERC and e-filing improvements
The report urges the IRS to develop “an improved screening process to better identify legitimate claims and significantly increase the volume of ERC claims it processes (allows or disallows in full or part) or assigns to an auditor to begin an examination.”
The report also recommends the IRS prioritize the acceptance of amended employment tax returns and applications for tentative refund requests for inclusion in the e-file program and electronic processing.
Employment tax issues top certain federal court
Finally, the report noted that there were 18 opinions in the Court of Federal Claims related to employment tax issues during FY 2023, making it the most litigated tax issue in that court. The NTA said that much of that litigation involved airline pilots, with 128 litigants over 16 cases, all related to employment tax issues.
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