Taxpayer Advocate Service42
Most Serious Problem #3: IRS Transparency
funds to help them retain employees. However, a cascade of issues, many but not all within the IRS’s control,
led to extensive delays in processing ERC claims
38
and ultimately to potentially fraudulent claims.
39
While the
IRS issued guidance relatively quickly after Congress rst enacted ERC legislation,
40
the guidance and rules
for eligibility confused many small business owners.
41
Taxpayers and tax professionals were largely unable
to reach knowledgeable IRS representatives who could clarify how the rules would apply in their situation.
42
e processes the IRS developed for ERC claims relied on manual processing of paper submissions at a time
when few employees were available to work those claims.
43
A TIGTA audit found that the IRS did not timely
update its programming and procedural guidance, adequately train employees on processes, or appropriately
prioritize ERC claims.
44
e combination of confusing rules, lack of documentation of eligibility
requirements on amended returns, and inecient processes created fertile ground for ERC mills to lure
business owners into ling fraudulent claims. As problems snowballed for the IRS, the agency has had to look
for new solutions to pull itself out from the situation, such as a moratorium on the processing of new claims
45
and procedures allowing taxpayers to withdraw existing claims.
46
e September 14, 2023, news release
announcing the moratorium also stated that the IRS was developing a settlement program for taxpayers who
had received an improper ERC payment and that it would provide more details in Fall 2023. However, as of
the drafting of this Most Serious Problem, taxpayers are still waiting to learn the terms and conditions of the
settlement program. Overall, while it was a dicult assignment for the IRS to develop an ecient method
to manage ERC claims during the pandemic, the path the IRS took led to the current situation. Hindsight
is a wonderful thing, but the ability to understand what caused the challenges and delays is important for the
IRS to understand to make better decisions in the future. Going forward, the IRS should be proactive, ensure
that its guidance and procedures are timely, simple, and practical for both taxpayers and IRS employees, and
address any failures in processes before they spiral out of control.
SOP Initiative 1.7 aims to “[p]rovide earlier legal certainty,” noting that in recent years, the IRS has been
able to provide guidance “only for priority issues, leaving many taxpayers unaware of how the IRS views the
application of the law and whether certain positions will be accepted.”
47
One project in the initiative is to
expand capacity in the Oce of Chief Counsel and the Department of the Treasury Oce of Tax Policy to
Delays Continue to Result in Businesses Not Receiving Pandemic Relief Benefits
https://www.tigta.gov/reports/audit/delays-continue-result-businesses-not-receiving-pandemic-relief-benefits.
SeeIRS Halts ERC Claims Processing Amid ‘Tsunami’ of Fraud, TAX NOTES
.
40 The IRS did not timely address all issues and is still releasing guidance. For example, the IRS only recently, in November 2023,
issued a 14-page legal advice memorandum on whether employers could have relied on recommendations that the Occupational
httdf.
41 Tax Equity: Enhanced Evaluation Could Improve Outreach to
Small Business Owners ERC Audits and the
IRS’s $80 Billion Cash Infusion, TAX NOTES, Oct. 31, 2022, https://www.taxnotes.com/tax-notes-today-federal/compliance/
.
42 AX
NOTES, Apr. 7, 2022, https://www.taxnotes.com/tax-notes-today-federal/credits/employer-org-calls-more-action-erc-processing-
backlog/2022/04/13/7dcpy.
43
hterations.
44 Delays Continue to Result in Businesses Not Receiving Pandemic Relief Benefits
https://www.tigta.gov/reports/audit/delays-continue-result-businesses-not-receiving-pandemic-relief-benefits.
45
https://www.irs.gov/newsroom/
to-protect-taxpayers-from-scams-irs-orders-immediate-stop-to-new-employee-retention-credit-processing-amid-surge-of-
questionable-claims-concerns-from-tax-pros.
https://www.irs.
gov/newsroom/irs-announces-withdrawal-process-for-employee-retention-credit-claims-special-initiative-aimed-at-helping-
businesses-concerned-about-an-ineligible-claim-amid-aggressive-marketing-scams.
47 https://www.irs.gov/pub/irs-pdf/p3744.pdf.