What the IRS Says About Employee Retention Tax Credit Delays

Last year, we reported on comments made by IRS Commissioner Charles Rettig during a hearing of the House Ways and Means Subcommittee on Oversight on March 18, 2021.

In response to Congressman Drew Ferguson (R-GA) asking, “Do you think the IRS is capable of moving these quarterly employment [tax] returns to the front of the line, and process them more quickly so that we can get help to these small businesses?” Commissioner Rettig responded, “I am familiar with the issue. We are looking into it in consideration to see what we can do, whether it’s to try to accelerate the process we have or doing a different process. We’re not there yet, but we are looking at it, and I am sensitive to it.”

A year later, on March 17, 2022, Commissioner Rettig was once again testifying before the House Ways and Means Subcommittee on Oversight. Here, he responds to questions from Representative Carol Miller (R-WV).

The Commissioner was unable to provide specific numbers regarding the number of ERC claims processed. He stated that the IRS does have procedures in place to prioritize ERC claims, but does not have the ability to automate such claims. Representative Miller pointed out that IRS processing delays of ERC claims were responsible for an understanding in Congress that the program was underutilized, thus leading to its early termination in the infrastructure bill. Commissioner Rettig appeared to miss that point and only responded that it was Congress, not the IRS that “got rid of the ERC.”

More recently, Commissioner Rettig testified before the Senate Finance Committee on April 8, 2022. The issue of the ERC was raised separately by Senators Ben Cardin (D-MD) and Maggie Hassan (D-NH). In response to Senator Cardin, the Commissioner provided an update that the IRS currently has a backlog of 1.9 million forms 941 and 324,000 forms 941-X. Many of these returns include ERC claims. He added, “We are working those on a priority basis, and you’re right, we have a number of priorities, but within the priorities obviously we have to make decisions, and they are at the top of the list.”

Senator Hassan asked, “What is the IRS doing to provide relief from higher taxes for small businesses still waiting for their employee retention tax credits?” This alludes to the fact that any ERC tax credits claimed via the payroll tax system must result in a corresponding reduction of the payroll deduction on the taxpayer’s income tax return. The IRS has already clarified in Notice 2021-49 that the income tax deduction must be adjusted for the tax year in which the wages used for ERC calculation were paid, not the year in which the tax credit was ultimately received. Therefore, a taxpayer with an outstanding ERC claim in the IRS backlog must decrease their payroll deduction for their 2021 income tax return due in April 2022, resulting in a higher amount of income tax. This puts the employer in a position of possibly needing to expend funds to cover a higher income tax bill caused by making a claim for emergency funds which they are still waiting to receive.

Commissioner Rettig responded that some may want to file for an extension to deal with this issue. However, Senator Hassan pointed out that extensions are not a solution since extensions do not delay the date on which taxes are due, only the date for which a final return can be filed. She added, “Here’s the thing, I think it would be very helpful for small businesses, who have navigated through so much during the pandemic, to actually know ahead of time, not to have to negotiate on an individual basis, about penalties, but if they haven’t gotten their retention tax credit yet, they should be able to know that their penalties will be waived if they do the calculation as if they got the tax credit that they’re owed.”

Commissioner Rettig replied, “We have a number of penalty provisions that we’re looking at.”


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