Werfel Notes ERC Process as Example of Digital Return Filing/Processing Benefits

IRS Commissioner Daniel Werfel’s April 16 testimony before the Senate Finance Committee on the tax filing season and IRS budget illustrated the past and current challenges of processing employee retention credit (ERC) claims as an example of a benefit provided by the Inflation Reduction Act of 2022 to increase the digital processing and filing of tax returns.

Since September 2023, the IRS imposed a moratorium on processing any new ERC claims, which is a COVID-19-era refundable tax credit aimed at helping employers and employees. This came after several warnings from the IRS on the dangers of fraud and erroneous claims, including ERC grifts being noted second on the Service’s annual “Dirty Dozen” list of the worst tax scams this year.

“The IRS has been flooded with ERC claims, and we are concerned that many of these claims were not being filed by businesses that qualify,” Werfel stressed. He also noted two programs the IRS implemented in order to help taxpayers make sure they qualify for the credit and options to reverse any claims that may have been made in error.

Currently, a taxpayer may request to withdraw an ERC claim that has not been paid yet or for employers that received a check but have not cashed it or deposited it. Claims withdrawn are treated as if they were never filed. “A total of 1,800 entities have withdrawn a total of $251 million in claims so far,” Werfel said.

Also, through March 22, employers were able to take advantage of an ERC voluntary disclosure program implemented by the IRS where ineligible ERC recipients could repay the IRS only 80% of the credit received if they met certain criteria. “This has yielded more than $225 million from over 500 taxpayers, with another 800 submissions still being processed, including many that came in at the last minute before the March 22 deadline,” Werfel noted.

Although ERC claims continued to be processed during the moratorium period, Werfel said that claims were processed much slower than before the IRS’s approach changed last summer and fall. He told the committee that the IRS’s progress “is hampered by the fact that amended returns from ERC applicants come in on paper and require time-intensive manual processing.”

The IRS’s status of mission-critical functions webpage shows more than one-million unprocessed Forms 941-X, as of December 9, 2023. That figure has not been updated since early December of last year.

However, a scanning process is being developed for pre- and post-moratorium paper returns to digitize information from pending claims. Werfel said that the current ERC situation “is an excellent example of where IRA funding will make a difference in the future.”

The IRS is receiving funding from the Inflation Reduction Act to improve its ability to receive digital information for ERC claims, which will help identify risks and develop response strategies. Werfel added that the IRS is serious about tracking down unscrupulous promoters of the ERC and conducting investigations into potentially false claims worth billions of dollars. The IRS’s Criminal Investigation Division is also conducting hundreds of investigations.

Werfel said that the IRS expects the digitalization process of Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, returns to be completed this spring and that the Service will continue its work to determine the next steps for the ERC.

One of those next steps could be to retroactively terminate any additional ERC claims as of January 31, 2024 if the “Tax Relief for American Families and Workers Act of 2024” (H.R. 7024) is signed into law. The bill cleared the House at the end of January, but has not moved much in the Senate, except for two readings in March and placement on the Senate’s legislative calendar under “General Orders.”

But, as Werfel noted in his testimony, the IRS averages 20,000 new applications for the ERC on a weekly basis despite the moratorium. Whether technology, legislation, or both can help with the ongoing woes of the ERC credit process at the IRS remains to be seen and the credit can still be claimed with Form 941-X through April 15, 2025 for claims from 2021.