Tax Credits

Law firms may have faced unique challenges during the pandemic making it difficult to determine their qualifications for the ERC. This blog explores misconceptions and eligibility.

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.