IRS Pushed To Reinforce Pandemic Tax Break Compliance

In response to the pandemic, Congress provided billions of dollars in tax credits to employers, which helped pay for sick and family leave, as well as retaining employees, but now the IRS needs to step up its compliance efforts, according to a new report. The report, released in early May by the Government Accountability Office (GAO), examined the impact of Congress’ various pandemic relief laws since 2020. This includes the CARES Act and the Families First Coronavirus Response Act. Provisions in those laws established paid sick and family leave credits, the Employee Retention Credit and payroll tax deferrals. As Congress enacted the new laws, the IRS continued to revise the relevant employment tax returns and guidance. The IRS managed to implement those complex provisions despite facing delays caused by facility closures and other challenges. Paid sick and family leave credits and Employee Retention Credits for 2020 totaled about $20.7 billion, including $9.8 billion for the leave credits claimed by over 1.5 million employers and $10.9 billion for the ERC claimed by 199,834 employers. Payroll tax deferrals totaled about $123.6 billion claimed by over 1 million employers. The totals seem to have been even higher last year, according to preliminary data.

The GAO noted that the IRS took steps to identify and plan for compliance risks associated with the leave credits and the ERC. Both types of credits expired last year but will be subject to examination by the IRS for several years after filing. The report found the IRS could strengthen its efforts by expanding the use of some of its project management practices. The IRS’ compliance objectives did not evolve to reflect statutory changes made after the CARES Act, are not measurable, and do not include criteria to measure success. In preliminary data, GAO found 337 filings, totaling $100 million, from employers that were established in April 2020 or later but then stopped filing employment tax returns. IRS screening filters flagged more than 65% of these filers for review. However, the GAO said those controls may still overlook ineligible entities because they do not consider certain factors, such as refund amounts and employer establishment dates.

The GAO recommended that the IRS could bolster its controls by using dates from the relevant legislation, refund amount and filing data, the establishment date for the employer, and other variables in filters to help identify tax credit recipients that may be ineligible employers. The GAO noted that one area of potential fraud was employer identification numbers. Although the employment tax return screening process flagged many of the returns identified with potentially ineligible credit claims, the report said it is possible some returns from fabricated EINs may have passed through the filters and received refunds. Annual employment tax returns are subject to fewer filters. In addition, none of the filters contains specific criteria to identify entities established after the enactment of the Families First Coronavirus Response Act and the CARES Act. IRS officials shared a list of compliance areas under consideration for using computerized filters to identify potential noncompliance specific to the tax credits. However, those areas are still under development, and the IRS did not have any further information in the most recent compliance plan. The GAO made other recommendations in the report, including the IRS developing a compliance plan consistent with project management principles, document compliance processes for adjusted returns and tax credits using restricted wages, and identify ineligible entities. The IRS agreed with two of the report’s recommendations but disagreed with the other three. The IRS contended that its current processes are sufficient, but the GAO insisted its recommendations are warranted.

Talley’s professionals have spent literally hundreds of hours reviewing the law, regulations, and FAQs issued regarding the ERC and PPP, and we are happy to assist you in the process.