The Internal Revenue Service (IRS) is under scrutiny from House Republicans who are demanding answers on the status of the employee retention tax credit (ERC), a pandemic-era relief program for small businesses. The lawmakers expressed their concerns in a letter to the IRS on Tuesday, after the agency announced a pause in processing new claims for the tax credit due to a surge of fraudulent filings.
What is the employee retention tax credit?
The ERC was created by the CARES Act in 2020 to help employers keep their workers on payroll during the Covid-19 crisis. The credit was later expanded and extended by the Consolidated Appropriations Act in 2020 and the American Rescue Plan Act in 2021. The ERC allows eligible employers to claim a refundable tax credit of up to $7,000 per employee per quarter for wages paid between July 1, 2021 and December 31, 2021. The total amount of the credit can be up to $28,000 per employee for the entire year.
Why did the IRS pause the processing of new claims?
The IRS announced on September 30 that it would temporarily stop accepting new claims for the ERC on paper forms, such as Form 941-X, which is used to amend an employer’s quarterly federal tax return. The agency said it needed time to implement additional verification measures to prevent fraud and abuse of the program. The IRS also said it would continue to process electronic claims and existing paper claims that were already in its inventory.
The IRS did not specify how long the pause would last, but said it would provide more information in the near future. The agency also urged employers to file their claims electronically, which is faster and more secure than paper filing.
How did House Republicans react to the IRS announcement?
House Republicans were not satisfied with the IRS explanation and asked for more details on the scope and impact of the processing pause. In a letter to the IRS Commissioner Charles Rettig, House Ways and Means Committee chairman Jason Smith, R-Mo., and Oversight Subcommittee chairman David Schweikert, R-Ariz., expressed their “continued concerns” about the ERC program and its administration.
The lawmakers asked several questions about the ERC program, such as:
- How many unprocessed paper claims are there in the IRS inventory?
- How long will it take to clear the backlog of paper claims?
- What are the plans to improve the processing efficiency and accuracy of electronic claims?
- What are the criteria and methods for identifying and preventing fraudulent claims?
- How will the IRS communicate with employers and taxpayers about the status of their claims and any changes in the program?
The lawmakers also requested a briefing from the IRS on these issues by October 15.
What are the implications of the processing pause for small businesses?
The processing pause may cause delays and uncertainty for small businesses that are relying on the ERC to stay afloat during the pandemic. Some employers may have already filed their paper claims and are waiting for their refunds, while others may have planned to file their claims soon and are now unsure how to proceed.
According to Pat Cleary, president and CEO of the National Association of Professional Employer Organizations (NAPEO), which represents firms that provide payroll and HR services to small businesses, the processing pause could affect millions of employers and employees. He testified at a House hearing in July that a single paper claim filed by a professional employer organization (PEO) could represent hundreds or thousands of small businesses.
Cleary also said that many small businesses were unaware of or confused about the ERC program and its eligibility rules, which changed several times since its inception. He urged Congress and the IRS to simplify and streamline the program and provide more guidance and outreach to small businesses.
