A backlog of Employee Retention Credit claims and persistent delays exists for Virginia taxpayers awaiting payment.
The ERC was created in response to COVID-19 to incentivize employers to keep their employees on payroll and off unemployment during the height of the pandemic. Virginia small businesses kept the promises, but years later, because of IRS processing delays, many are still waiting to receive the tax credits they believe they are due.
U.S. Sens. Mark R. Warner and Tim Kaine regularly hear from constituents regarding unprocessed claims and lack of transparency and communication from the IRS regarding the status of claims. The senators wrote to IRS Commissioner Danny Werfel expressing concern about the delays on Friday.
“While we applaud the work IRS has done since June 20th to root out improper claims and identify valid claims, we continue to hear from an increasing number of Virginians frustrated by the lack of clarity on when their individual claims will be adjudicated,” the Senators wrote.
Warner and Kaine wrote that businesses and other organizations need to know about their ERC claims so that they can undertake investments in operations, workforce and capital projects.
“Unfortunately, many of our constituents are telling us they cannot make informed decisions because they have no knowledge as to when and if their claims will be processed. Many Virginia organizations with ERC claims have been waiting a year or more with no response whatsoever from the agency. Despite our best efforts to advocate on behalf of these constituents, engagement from our offices have similarly yielded little to no clarity on when claims will be processed. Simply put, this is unacceptable,” the senators continued in their letter.
The IRS asserts that in the wake of the pandemic the program was overwhelmed by improper and, at times, fraudulent claims. In order to address the fraud, last fall, the IRS announced a moratorium on processing claims submitted after Sept. 14, 2023. However, this moratorium offered no clear path forward for businesses who had submitted legitimate claims. On June 26, 2024, National Taxpayer Advocate Erin M. Collins reported that the backlog of ERC claims awaiting adjudication had grown to about 1.4 million.
The IRS has taken action in recent months to address the backlog. On June 20, 2024, the IRS announced the end of a detailed review of more than 1 million ERC claims and confirmed that a significant portion were improperly filed. The Service stated it would begin to deny high-risk claims while “judiciously processing” claims found with low levels of risk. More recently, the Service announced that it was moving forward with processing ERC claims submitted before January 31, 2024, including processing a block of 50,000 low-risk claims for payment. While the Senators welcome the step forward, the lack of clarity and information from the IRS is still a major concern.
In their letter, the Senators also specifically asked that the IRS address the following questions:
- The IRS’ June 20th announcement indicated that over 1 million ERC claims have been categorized into three designated categories: 10%-20% are “Highest-risk” 60%-70% are “Unacceptable risk,” and 10%-20% are “low risk”. On August 8th, IRS announced that 28,000 high-risk claims received disallowance letters, “thousands” of unacceptable-risk claims are under audit, and 50,000 low-risk claims are being processed and should receive payment soon. This still leaves hundreds of thousands of claims the IRS has yet to act on. What is the timeline for the remaining applicants? When will all pending claims have received an initial response, whether it be approval, denial, or request for further information?
- How will filers not part of either initial group be made aware that their claims will take longer?
- How were the 50,000 claims IRS has said will soon receive payment identified? Was any consideration given to the financial situation of the taxpayers in that block? Now that processing of valid claims is beginning to ramp up, will there be a pathway for taxpayers reporting with documented financial hardship to have their claims adjudicated more quickly?
- We have made numerous inquiries on behalf of Virginians and receive new requests frequently. How does the agency intend to partner with our offices to ensure that these inquiries are reviewed and addressed in a timely manner?
Warner and Kaine have consistently pushed for faster processing of outstanding ERC claims. In April of 2023, Sen. Warner directly raised this issue with Commissioner Werfel during a Senate Finance Committee Hearing, as well as in multiple direct calls to the commissioner. Sens. Warner and Kaine have also been tireless advocates for improving IRS customer service and accelerating return times.
The Senators strongly supported the Inflation Reduction Act — legislation which provides funding to modernize IRS systems and improve customer service when paying taxes. This will help ensure the IRS has the resources it needs to process tax returns quickly, get rebates to taxpayers faster, and address challenges Virginians have when filing taxes. These investments have improved IRS response rates this tax season from answering two out of every 10 calls to answering nine out of every 10 calls.
Warner has pressed the IRS to address pandemic-related processing delays for several years. He first raised concerns over backlogs at the IRS in February 2021, as millions of Americans waited for delayed stimulus payments and processing of their tax returns. In January 2022, as the tax filing season opened, Warner again called on Treasury Secretary Janet Yellen and then-Commissioner Rettig to quickly address reports of unprocessed tax returns for the 2020 filing season. Later that month, Warner and Kaine called on the IRS to provide relief for taxpayers amidst the backlog – a request they again reiterated in a bipartisan and bicameral March 2022 letter.