If you are a small business owner and have been waiting a long time for your ERC claim to be processed, you are not alone. There is currently a backlog of nearly one million unprocessed Employee Retention Credit (ERC) claims. But, if you are in New York, you now have an ally in Senator Kirsten Gillibrand (D-NY).
On May 4th, Senator Gillibrand wrote IRS commissioner Danny Werfel expressing her concern over the size of the backlog, and urging the commissioner to provide an update on the IRS' progress in working through it. Despite Gillibrand's request for a response by May 18th, as of this posting, commissioner Werfel has yet to do so.
The Employee Retention Credit (ERC) was introduced in 2020 as part of the CARES Act to encourage businesses to keep employees on payroll during the pandemic. Eligible employers can claim a refundable tax credit up to 50% of $10,000 in wages paid if their business was suspended or gross receipts declined over 50%.
In April 2023, the number of unprocessed ERC claims reached 1 million, before dipping slightly to approximately 960,000 unprocessed claims in May 2023.
In her letter to commissioner Werfel, Senator Gillibrand blames staffing issues, "chronic underfunding" and outdated technology for the ERC backlog. ERC claims are made using Form 941-X, “Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.” Currently, only a paper copy of form 941-X can be completed, and it can only be submitted by mail. There is no electronic filing option. This means that each claim must be processed manually, and there are currently only two locations processing these claims.
In a September 2022 report, the Treasury Inspector General for Tax Administration (TIGTA), cites recent changes through Congress with the passage of the Infrastructure Investment and Jobs Act as a major reason for the backlog. This legislation changed some of the claim processes for recovery startup businesses. However, according to TIGTA's report, the IRS lacked "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, a company must meet two main qualifications:
1. The company must have started operating after February 15, 2020
2. The company's gross receipts may not have exceeded $1,000,000 over a three-taxable-year period.
TIGTA also attributes the backlog to the IRS' delays in processing claims, which they say were caused by a "lack of updated programming and procedural guidance," "a lack of training, erroneously suspended claims, and a lack of prioritization of claims."
Senator Gillibrand included 3 main questions for commissioner Werfel in her letter:
a) Is the IRS planning on allowing the e-filing of 941-X forms?
b) Is the IRS planning to expand its digital scanning efforts to include scanning of Forms 941-X?
a) Has the IRS reached the goal of resolving 40,000 of the claims per week yet? If no, when do you expect to reach that goal?
b) Are additional staff needed to eliminate the backlog or do you find the current staffing levels adequate?
c) Can you provide Congress semimonthly updates on the IRS ERC backlog until the backlog reaches under 10,000 in total?
Again, as of this posting, commissioner Werfel has not yet directly responded to Senator Gillibrand's letter. In April, Werfel did give testimony to the Senate Finance Committee, predicting that roughly 40,000 claims would be handled per week following the 2023 tax filing season. Additionally, Gillibrand has asked for bi-monthly progress reports until the backlog is reduced to less than 10,000.
If you’re looking for further updates on this and all tax-related information for your payroll department, look no further than Complete Payroll’s blog. With hundreds of articles to help you navigate payroll issues, Complete Payroll will keep you up-to-date.
Rick Fish, Jr., is a former CEO and current COO (Chief Operations Officer) at Complete Payroll, as well as a Managing Partner at the company. Rick is a Certified Payroll Professional (C.P.P) as designated by the American Payroll Association (APA), and a licensed Life, Accident, and Health Insurance Agent. Rick graduated Magna Cum Laude from the State University of New York at Oswego with a B.S. in Accounting.