Tax Credits

Max Shenker provides another update on the backlog of unprocessed ERC claims at the IRS, which has more than doubled since the beginning of 2023.

Find out how to optimize and streamline the WOTC screening process so your business can use WOTC to better offset hiring costs.

The IRS has reiterated warnings against improperly claiming the ERC, while the bureau also investigates fraud schemes including stolen ERC checks.

On March 23, 2023, fifteen Republican members of the House Ways and Means Committee sent a letter to the new IRS Commissioner, Daniel Werfel, expressing concern about chronic delays in the processing of employee retention tax credit (ERTC/ERC) claims. The letter asked for responses to six specific questions related to the ERC backlog: “1. What are the reasons contributing to the delay of ERTC claims being processed, and what if anything has the IRS done to address these challenges? “2. What is the average wait time between when employers filed their ERTC claim and when they receive a refund from the IRS? How has the average wait time changed over the last six months? “3. Are there any restrictions that the IRS is placing on who is eligible for ERTC credits aside from the eligibility requirements detailed above? If so, please detail those restrictions and why the IRS has implemented those restrictions. “4. Are employers able to track their ERTC refund status with the IRS? If so, explain the process by which employers can track their ERTC refund status. “5. When does the IRS anticipate completing the processing of all ERTC claims and issuing all necessary refunds? “6. What is the IRS doing to address potentially fraudulent ERTC claims from ERTC ‘mills’?” As we have reported in the past, the ERC backlog of unprocessed claims has been steadily growing since the fall of 2022. The most recent figure, as of March 29, 2023, is that the IRS has a backlog of 890,000 unprocessed Forms 941-X. It is unclear whether this rapid increase in unprocessed forms indicates that the IRS has paused its processing of forms, or that the volume of new forms has accelerated and outpaced their processing capacity. While the letter from the members of Congress requested responses from and a meeting with IRS by April 3, a source informed us that a meeting has yet to occur.

First on the IRS's "Dirty Dozen" list are aggressive ERC providers making offers too good to be true. Here are four questions to vet your ERC partner.

Find out how to use IRS Form 941-X to maintain compliance with Form 941 or correctly file for certain tax credits.

Learn which employees are eligible for ERC and how large healthcare employers can claim it. Don't miss out because you believe you're too big or profitable.

President Biden's 2024 budget proposing giving the IRS more time to audit ERC claims, possibly reducing ERC payments by $2 million in fiscal year 2024.

President Biden and the IRS are targeting COVID-relief and ERC fraud. A new IRS warning specifically calls out bad actors pushing ineligible people to file.

Daniel Werfel, nominated to be the new IRS Commissioner, responded to these questions from Senators regarding delays to ERC refunds.

The IRS has increased estimates for new Forms 941-X, but even this might be outstripped by the actual number of new ERC claims they are receiving.

California Governor Gavin Newsom included modifications to the New Employment Credit (NEC) in his latest budget. Learn what these changes are.

An Inflation Reduction Act tax credit transfer or direct pay election may be the solution for taxpayers looking to claim new clean energy credits.

The IRS is warning employers against ERC fraud. The following examples of fraudulent practices have resulted in fines and/or convictions.

When committing to a hybrid workforce with remote workers, employers should consider the local tax incentives they may forfeit, and new ones to claim.

Hiring tax credits can have a significant impact on a company’s tax liability. For example, by using the Work Opportunity Tax Credit (WOTC), companies can receive up to $9,600 in federal tax credits for certain employees who are hired. However, all too often, companies fail to fully capitalize on the benefits of this tax credit as it can be a complicated and time-consuming procedure for each party involved. Applicants may choose not to complete the WOTC screening questions and disclose the necessary data while employers may be afraid that identifying candidates as members of target groups puts them at risk of breaking anti-discrimination laws. Still, taking advantage of this valuable credit does not mean sacrificing a positive candidate experience. To achieve the cost-effectiveness of this program and claim available tax credits, employers can outsource WOTC screening and administration and rely on WOTC service providers. Recent Updates to WOTC Screening Requirements WOTC screening necessary to determine eligibility, submitting the right paperwork and filing for the tax credit are the basic steps involved in taking advantage of the WOTC. This process is relatively straightforward, but can also be overwhelming when there are large volumes of applicants and new hires to process. At the same time, WOTC screening can be easily automated, allowing employers to overcome the complexity surrounding eligibility and credit tracking by enlisting the help of WOTC service providers. In September 2022, the Internal Revenue Service (IRS) published updated information about the WOTC to help employers deal with a tight labor market and to respond to an investigative report. The report published by an investigative news organization indicates that WOTC was often being claimed by temporary employment agencies that hired convicted felons as workers and soon laid them off. The updates include information on the pre-screening and certification process. To satisfy the statutory requirement, Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit must be completed by the job applicant and the employer on or before the day a job offer is made. After pre-screening a job applicant, employers must request certification by submitting Form 8850 to the appropriate state workforce agency no later than 28 days after the employee begins work. Overcoming WOTC Screening Challenges with WOTC Service Providers WOTC service providers can support WOTC screening processes to identify eligible candidates and help employers calculate and claim the credit. However, to ensure the most favorable outcomes, employers need to take into account different factors, such as the solution, the results, and the fees. Given that most employers want to ensure that WOTC screening does not have a negative impact on candidate flow or the candidate experience, it is important to integrate the WOTC workflow with the recruiting system so that processes are quick, easy to understand, and flow seamlessly. At the same time, because the questions as worded on the Form 8850 can be confusing, presenting the eligibility determining questions to the candidate in easy-to-understand language is also important. To accomplish these objectives, automated WOTC solutions offer effective surveys that eliminate redundant questions, source information from the Applicant Tracking Systems (ATS) through an integration, and ask the questions in an easy-to-understand format. Therefore, when considering a WOTC provider, employers should make sure that they have a WOTC module that integrates with their ATS, enables changes to their WOTC solution for a consistent look and feel, and has a design that positively impacts the overall user experience. In addition to this, employers need to measure the value of WOTC participation. Comparing the potential credit opportunity with other similarly situated companies can provide a good estimate of the relative value of implementing a WOTC solution as well as insight into results and possible areas for improvements. Improved WOTC Screening for Better Results Even though there are complexities related to WOTC screening, the benefits that employers and employees can experience with this program are worth the effort. Any business, regardless of size or industry, may be eligible to claim the tax credit and, since there is no limit to the number of individuals that employers can hire, there is also no cap on the number of credits that they can claim. Choosing the right WOTC service provider can help employers maximize WOTC benefits even more. After comparing the specific solutions, results and fees involved, it is important to choose a user-centric provider that secures the user experience, understands a company’s culture and process, and offers consultation and flexibility. By doing this, employers can significantly improve WOTC screening compliance rates and simplify data collection, but also help applicants complete the form quickly and correctly and meet the necessary deadlines. Automate WOTC management to maximize benefits with a solution that fits your needs, helps your business thrive and encourages new hires to take part in WOTC screening.

In September, we wrote about a Treasury Inspector General for Tax Administration (TIGTA) report highlighting processing delays at the IRS directly affecting ERC claims. At that time, TIGTA reported they, “found that ongoing and considerable delays in the processing of amended Forms 941 filed by businesses resulted in businesses not timely receiving the immediate financial relief for which this legislation was enacted. As of February 1, 2022, there were 447,435 Forms 941-X waiting to be processed. Over 90 percent (402,814) of these Forms 941-X were over-aged, i.e., have not been processed within 45 calendar days.” Since late 2021, the only available method for filing an ERC claim with the IRS has been via Form 941-X, the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. There is no option for filing this form electronically. Mailed or faxed paper returns must be reviewed manually by the IRS, but only after the original Forms 941 have been processed. IRS ERC Claims Update A new report by the Internal Revenue Service Advisory Council (IRSAC) indicates that the backlog problems related to ERC are ongoing: “The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Employee Retention Credit that businesses could claim through the Form 941-X process. Millions of businesses have submitted these forms, but they have not been processed due to significant IRS backlogs in processing paper returns. According to the Taxpayer Advocate, the IRS was backlogged almost three million Forms 941 Employer’s Federal Tax Return, and Forms 941-X.” Similarly, a recent (11/10/2022) blog post by the National Taxpayer Advocate, Erin Collins, said: “Likewise, business taxpayers are continuing to feel the strain of delays in IRS processing. Some business taxpayers are still waiting for pandemic relief benefits, as the IRS has over 250,000 unprocessed Forms 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, in its inventory. Unfortunately, some cannot be processed until the related Form 941, Employer’s Quarterly Federal Tax Return, is processed first, and as of November 2, the IRS still had about 2.5 million Forms 941 in its inventory awaiting processing. I suspect a large portion of the Form 941-X amended returns relate to the Employee Retention Tax Credit authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020) and extended by the Consolidated Appropriations Act (2021).” The IRS regularly updates the number of unprocessed Forms 941-X, which have ranged from a high of 446,000 in January 2022 to a low of 199,000 in September 2022. As of November 16, 2022, there are 286,000 unprocessed returns. But what these number don’t tell us are the actual number of ERC claims being made, or at least the number of Forms 941-X being filed. Does the fact that the backlog grew from 199,000 to 286,000 from September to November mean that IRS received 96,000 new forms while processing none, or that they received a much larger number but also processed a large number? According to the IRSAC report, “Millions of businesses have submitted these forms.” What is the basis for this claim? Tracking Forms 941-X and 941 Until very recently, the IRS has not reported the number of Forms 941-X they receive each year. However, in the 2021 Annual Report of the National Taxpayer Advocate, they tell us the average number of Forms 941-X received between calendar years 2018-2020 was 331,492. In calendar year 2021, that number more than doubled to 738,422. Newly reported numbers from the IRS tell us that for fiscal year 2021 (October 1, 2020 – September 30, 2021), they received 564,701 Forms 941-X, and they project receiving 1,087,800 in fiscal year 2022. While that fiscal year has ended, final counts are apparently not yet available. Apparently, IRSAC’s assertion that, “Millions of businesses have submitted these forms,” must include both amended 941-X returns and Forms 941 original returns. Projecting Future Claims Using the available information, at the beginning of fiscal year 2022, IRS started with a backlog of about 376,000 unprocessed Forms 941-X. Using their recent estimate, they received approximately 1.1 million new forms through September 2022. They ended September 2022 with a backlog of 199,000, meaning they processed between 1.2 and 1.3 million returns during the fiscal year. IRS projects the number of Forms 941-X for fiscal year 2023 will fall to about 677,000. But if the IRS was able to process over 1.2 million forms last fiscal year, the increase in the backlog of unprocessed returns from September through November indicates a rate of new forms well beyond that projection. Learn more about claiming the ERC by speaking with an Experian Employer Services tax expert.

Hiring peaks can inundate HR departments with additional administrative burdens, making it a struggle to keep up when there's a surge of new applicants and employees. At certain times of the year applications in the retail sector can increase by 30%. The good news is there are processes employers can incorporate now to simplify hiring, improve onboarding, and capture tax credits to save money with each new hire. Learn from Tim Cate, Vice President of Strategy with Experian Employer Services and Rhea Moss, Director of Data Insights and Customer Intelligence with iCIMS, in this discussion moderated by Matt Kelm, Vice President of Sales with Experian Employer Services. This excerpt is from a webinar with Experian Employer Services and iCIMS on how to improve onboarding to simplify hiring. Watch the full version. Matt Kelm: When it comes to themes that you're hearing around, you know, "ghosting", or people call it "quiet quitting," do you anticipate those are trends that will continue or will they continue perhaps only in certain sectors like retail? Rhea Moss: I think there's a lot of misaligned expectations between employers and candidates right now. When we think of ghosting, what immediately comes to my mind is asking if this is a candidate's market or an employer's market, and where they shift and when the candidates really feel like they have the upper hand. I will say they're more likely to say they don't like the way this process is going so they're tapping out if there's confidence in that. When we'd expect higher levels of unemployment or more of an almost desperate job seeker, it's very different. A job seeker who's willfully and happily employed versus a job seeker who really needs to put food on the table, they're going to behave in very different ways and I think that over the last year what we've seen is a lot of that power dynamic really shifted to the candidate where they said I feel confident enough to put my foot down. I would say similar thoughts on the quiet quitting piece is if you're in a role and you think I'm allowed to set my own limits and my own expectations and I'm only going to do X right, that it's similar both as an employee and as a candidate, where you say I'm going to put up with only so much and anything else 'no thank you,' that comes from a level of confidence in the labor market and I would say I think some of those trends are long-term trends probably, but I think we're seeing that an overwhelming majority will start to shift as we see things like the unemployment levels go up. Matt Kelm: That's fantastic. Last question for you, Rhea, in September we saw the conference board leading economic indicator go negative for the first time in a while. I believe every time that indicator has gone negative since the 50's we've hit a recession roughly seven months after that, so any predictions for when you see not just the recession but the labor market turning? And I think that's an important thing to call out for the audience. If we're seven months out of September traditionally when a recession hits, when can we start to actually see tangible softening and a transition from the candidate market to the employer market? Rhea Moss: It's a great question. My favorite answer to this question is usually my crystal ball is broken, I'm very sorry, but what I will say is we're seeing so many things at play and where I bring that back is really in the last two to three years we saw factors of employment and of talent acquisition, so it's not just unemployment and underemployment and inflation you've added things like emotion, a lot of emotion, you've added things like safety and we talked about this a lot in 2020 but I don't know that we did. I feel like we've kind of let these conversation go to the wayside where we talk about candidates that don't want to go back to work because they're worried about getting sick, or candidates that are worried that like their child's school closes and they're home for a few weeks and while those things are not nearly as common as they were in the early days of the pandemic, there are still pieces of that. There's a lot more human emotion that's brought into the employment situation in ways that I think historically we didn't think of. It was very factual, unemployment's at X number of jobs openings at Y and you go find a job and you do your job and you get your paycheck. Now when we talk about things like 'quiet quitting,' there's an emotional aspect to that that I don't think we were really thinking of as a main factor a couple years ago. As far as my answer to you, I don't know how are people going to react. It's not just what the economy is going to do, what is inflation going to do? What will the interest rate be like? We can rattle off the academic thought process there but I think there's a huge psychology piece. We haven't been through a pandemic before to know how long this takes to wear off, but it is still a factor in play today. Matt Kelm: Good stuff thank you very much, Rhea. We are going to transition over to Tim, he's going to talk a little bit more about the impact of the Work Opportunity Tax Credit. Over to you Tim. Tim Cate: Thanks Matt, thanks Rhea, that was really fascinating information, and again I'm going to try to tie a lot of that in because it does tie in to the Work Opportunity Tax Credit, and exactly kind of what we're seeing in the market today as well a lot of which was more empirically visible, but it's really backed up by some of the data points that Rhea provided so very helpful. What we're seeing in the current state of the retail workforce is that there is a tremendous amount of pressure to get employees through the hiring process quickly [and improve onboarding.] We constantly hear from our clients that say we want to get people through more quickly, but on balance with that is all of this wage and other inflationary pressures so companies are looking for ways to save money, to kind of squeeze out any bit of savings they can find through the system, but at the same time balance that with keeping the candidate experience as good as possible and keeping the time to apply as short as possible. WOTC has been around for a long long time and I'll provide a little bit more background on that but it continues to be in place to encourage employers to hire individuals who experience a little bit more difficulty in finding a job, or maybe to offset some training costs for people who may be less experienced so it is designed to be an offset and sort of worked out. A quick background on the Work Opportunity Tax Credit. you will hear it called WOTC and in the industry we often just say WOTC, so when you hear it they're synonymous but it's a tax credit, an incentive, that has been available to companies for hiring people with certain demographic backgrounds. You can think of people with the military, veterans who have been unemployed, people receiving food stamps or Medicaid and families that have received those benefits, really even folks who have been unemployed for a long period of time, those are all target groups. There are 11 of them, but generally that's the type of criteria that qualifies for the program. It's been in place since 1996 and has been modified and extended. It typically gets extended for a year or two at a time, sometimes longer than that as is the case right now. We're in the midst of a five-year extension that takes us through 2025 which is very fortunate because that gives some certainty, but again we know that it's been around since 1996 and we expect that it's going to continue because it does have such strong bipartisan support and even ahead of 1996 there was a predecessor program that worked much the same. There were some pretty key differences, but this predecessor program called Targeted Jobs Tax Credits, or TJTC, was in place beginning in 1980. So this program or one like it has been in place for over 40 years and it's definitely a tool that is used to incentivize hiring among these groups that are traditionally deemed to have higher rates of unemployment. It is jointly administered by the IRS which is a taxing authority and the Department of Labor which is really on the side trying to make sure there are these opportunities, and the design is to incentivize employers for hiring these individuals but there is a key caveat, and that caveat is that they are supposed to know they're hiring somebody ahead of that job offer. So there is a statutory requirement that screening occur on or before the day a job offer is made. It can be on that day but typically doing it while onboarding is too late, so I'll talk a little bit more about this statutory of compliance requirements and the dangers of trying to circumvent that as well. Watch the full webinar to learn more about steps to improve onboarding for tax credits.