HIGHLIGHTS: Delays Continue to Result in
Businesses Not Receiving Pandemic Relief Benefits
Final Audit Report issued on August 31, 2022 Report Number 2022-46-059
In July 2021, TIGTA issued a report
on the IRS’s efforts to implement
employer tax credits included in
the Coronavirus Disease 2019
(COVID-19) relief legislation. This
report is a continuation of our
review of the IRS’s business tax
provisions included in the
legislation passed in response to
the pandemic. The overall
objective of this review was to
assess the IRS’s processes and
procedures to ensure the accuracy
and validity of COVID-19 related
employer tax credits on original
and amended tax returns.
Impact on Tax Administration
Employers entitled to COVID-19
related employer credits that did
not claim them on their original
Form 941,
Employer’s QUARTERLY
Federal Tax Return
, or that wanted
to increase the amount originally
claimed filed a Form 941-X,
Adjusted Employer’s QUARTERLY
Federal Tax Return or Claim for
Refund
, to reduce their tax liability
and receive a direct payment
resulting from any refundable
credit amount. The timing of the
various legislative provisions
increased the number of
Forms 941-X the IRS received from
employers that wished to amend
their original Form 941. As of
February 1, 2022, there were
447,435 Forms 941-X waiting to be
processed.
Continued processing delays have prevented businesses from
receiving pandemic relief benefits. The IRS did not begin processing
claims for qualified Sick and Family Leave Credits and the Employee
Retention Credit for 12 months and claims for Social Security Tax
Deferral for 16 months after the pandemic relief legislation was
enacted. This was due to a lack of updated programming and
procedural guidance. A lack of training, erroneously suspended
claims, and a lack of prioritization of claims contributed to additional
delays processing claims.
TIGTA identified additional 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. To qualify as a recovery
startup business, generally, an employer had to begin operations
after February 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 review as required. TIGTA
projected that 153 out of 209 amended returns with nonrefundable
employer credit claims that met the referral criteria were not referred
to Examination as required resulting in $45 million in potentially
erroneous nonrefundable employer tax credits being allowed. This
occurred because the IRS’s internal guidance did not include
processes to refer claims with significant refundable employer credits
to Examination for review. In addition, tax examiners were not always
referring amended returns without a refundable tax credit as
required.
What TIGTA Recommended
TIGTA made nine recommendations to the IRS, including developing
plans to prioritize processing backlogged claims, updating
Examination referral criteria to include Forms 941-X with refundable
credit claims, and developing a systemic process to identify
Forms 941-X that meet referral criteria and alerting the employee
when processing the claim of the need to refer the return to
Examination for review.
The IRS agreed with eight of the nine recommendations. The IRS did
not agree additional training was needed for employees related to
referring Forms 941-X to Examination for review. Management
stated they completed subsequent reviews of completed Form 941-X
claims and determined no additional training was needed. However,
the IRS’s subsequent reviews do not address the concerns identified
in our report. Accounts Management employees cited unclear
guidance and training as to why 73 percent of claims were not
referred when required.