IRS watchdog pushes for transparency on pandemic-era small business tax credit backlog

Many taxpayers are experiencing “long delays and uncertainty” amid a backlog of roughly 1.4 million pandemic-era small business tax credit claims, according to the national taxpayer advocate.

Enacted to support small businesses during the Covid-19 pandemic, the employee retention credit, or ERC, is worth thousands of dollars per eligible employee. After a wave of “questionable claims,” the IRS stopped processing new filings in September.

But prolonged processing delays by the IRS are “harming taxpayers with valid ERC claims,” as many have already waited a year or longer, National Taxpayer Advocate Erin Collins wrote in her midyear report to Congress.

“It’s time for the IRS to be transparent on how and when it plans to move forward addressing these ERC claims,” she wrote.

More from Personal Finance:
IRS will deny billions in ‘improper’ pandemic-era small business claims
Nearly 1 in 5 student loan borrowers keep their balance a secret from partner
The typical new home in the U.S. is shrinking. Here’s what that means for buyers

There was a backlog of nearly 666,000 unworked ERC claims before the September moratorium, and nearly all filings sent before the moratorium remain unprocessed, according to the report. Some 85% of pending ERC claims are more than 120 days old.

“The IRS is between the proverbial rock and a hard place when it comes to ERC claims,” Collins said in a statement.

Without a thorough review, improper ERC payments could cost tens of billions of dollars. But if the IRS denies ERC claims and further delays payments, “the very businesses for which Congress created the ERC will be harmed again,” she said.

In the coming weeks, Collins said she aims to work with IRS leadership to accelerate ERC processing of eligible claims, including several thousands of pending cases with the Taxpayer Advocate Service.

Her report comes less than one week since the IRS announced it would deny billions of dollars’ worth of “improper” ERC claims while prioritizing lower-risk filings.

“This is one of the most complex credits the IRS has administered, and we continue to ask taxpayers for patience as we unravel this complex process,” IRS Commissioner Danny Werfel said in a statement. “Ultimately, this period will help us protect taxpayers against improper payouts that flooded the system and get checks to those truly eligible.”