The Treasury Inspector General for Tax Administration (TIGTA) released a report regarding its continued review of the IRS’s efforts to implement various employer tax credits provided by COVID-19 tax relief legislation. TIGTA issued a report in July 2021 of its initial audit of pandemic-related tax relief implementation (see Payroll Update, 07/14/2021). The overall objective of the audit was to assess the IRS’s processes and procedures to ensure the accuracy and validity of pandemic-related employer tax credits on original and amended tax returns [TIGTA Report Number: 2022-46-059].
Delayed Form 941-X processing.
Employers use Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) to claim COVID-19 related tax credits not originally claimed on Form 941 (Employer’s Quarterly Federal Tax Return) or to adjust credit amounts. As a result of the timing of legislative changes, the IRS developed a backlog of Forms 941-X awaiting to be processed. The IRS currently has a backlog of 207,000 unprocessed Forms 941-X as of September 2, 2022. This figure was steadily decreasing, but this is an uptick since August 17 (135,000 unprocessed 941-Xs). The IRS has stressed in the past that unprocessed Forms 941-X do not necessarily contain COVID-19 related tax credits. Forms 941-X will not be processed until related Forms 941 are processed.
“Continued [IRS] processing delays have prevented businesses from receiving pandemic relief benefits,” TIGTA said. According to the audit, processing claims for qualified Sick and Family Leave Credits and the Employee Retention Credit did not begin until 12 months after the relevant legislation was enacted. Processing claims for Social Security Tax Deferral was similarly delayed for 16 months.
This was attributed to “a lack of updated programming and procedural guidance.” A lack of training, erroneously suspended claims, and a lack of prioritization of claims further compounded the problem, the audit said.
TIGTA also had concerns with the IRS’s processes to implement retroactive termination of the Employee Retention Credit. “Specifically, the IRS does not have processes to verify a recovery startup business or effective controls to deny the Employee Retention Credit for non-recovery startup businesses,” it said. As explained in the audit, to qualify as a recovery startup business, generally, an employer had to commence operations after Feb. 15, 2020, and have annual gross receipts that did not exceed $1 million over a certain three-taxable-year period.
In addition, amended returns with Employee Retention Credit claims were not referred to Examination for the required review. “This occurred because the IRS’s internal guidance did not include processes to refer claims with significant refundable employer credits to Examination for review,” TIGTA said, adding that tax examiners were not always referring amended returns without a refundable credit as required.
TIGTA made nine recommendations to the IRS, including developing a plan to prioritize processing backlogged claims. The IRS agreed to eight of nine of the recommendations, but did not agree that additional training was needed for staff regarding referring Forms 941-X to Examination for review. TIGTA pointed out that when Account Management employees were asked why 73% of claims were not referred when required, the employees cited unclear guidance and training. Further, IRS’s subsequent reviews did not address the concerns identified in the TIGTA report and TIGTA reiterated their recommendation for additional training in the report.
For full coverage of COVID-19 employer tax credits, see Payroll Guide ¶20,900 et seq.
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