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Smith & Schweikert Demand Answers from IRS on Employee Retention Tax Credit Backlogs, Fraud, and Exploding Cost

October 03, 2023

WASHINGTON, D.C. – With concerns over fraud, an ongoing backlog of claims, and a rapidly increasing cost within the Employee Retention Tax Credit (ERTC) program, Ways and Means Committee Chairman Jason Smith (MO-08) and Oversight Subcommittee Chairman David Schweikert (AZ-01) wrote to IRS Commissioner Daniel Werfel today demanding a plan from the agency on what it is doing to address these concerns – including:

  • How the agency will tackle the level of fraud within the program during its current moratorium on the processing of new claims;
  • What legislative proposals it would like Congress to take to address fraud within the program generally;
  • Specific questions regarding the speed at which the agency expects to process existing claims under the current moratorium and how it will ensure it is done in a timely manner;
  • What data led the agency to impose a moratorium;
  • The total amount of refunds processed to date; and
  • When it expects to eliminate the claims backlog.

We write to highlight continued concerns surrounding the Employee Retention Tax Credit (ERTC) (also referred to as the Employee Retention Credit) and ask that the Internal Revenue Service (IRS) provide the Committee on Ways and Means with the agency’s plan to resolve the backlog of unprocessed ERTC claims, prevent fraud, and ensure hard working, eligible businesses receive the credit to which they are entitled in a timely manner,” wrote Chairmen Smith and Schweikert.

Today’s letter comes on the heels of a decision by the IRS on September 14, 2023, to impose an immediate moratorium on the processing of new ERTC claims until 2024. It also follows a hearing by the Ways and Means Subcommittee on Oversight earlier this summer that shined the spotlight on the confusion, delays, and fraud within the program, in part due to IRS mismanagement.

On July 27, 2023, the Ways and Means Subcommittee on Oversight held a hearing titled ‘The Employee Retention Tax Credit Experience: Confusion, Delays, and Fraud.’ The hearing highlighted the large backlog of ERTC claims at the IRS and an alarming solicitation campaign by third party ‘mills’ spreading misleading information and engaging in fraud,” wrote Chairmen Smith and Schweikert. “The hearing also made it clear that repeated changes to ERTC guidance by the IRS and a lack of regular communication from the agency regarding the credit has exacerbated applicants’ frustration and fostered an environment ripe for fraudsters…

Fraud in the ERTC program has become so prevalent that it earned a place on the IRS’s annual ‘Dirty Dozen’ list of schemes and scams that make taxpayers vulnerable to personal and financial risk. In addition, you suggested at a public roundtable on July 25, 2023, that moving up the 2025 end date for the program may help with fraud, saying, ‘[w]e will work with Treasury to explore legislative solutions we can share with Congress to help address fraud and error, including potentially putting an earlier ending date for businesses to claim the credit…’ While we want to work with you to consider action to support these proposals, we have yet to see any legislative proposal from the IRS for Congress to consider.”

Smith and Schweikert also called into question the IRS’s assertions that it has cleared the backlog of unprocessed ERTC claims, pointing to the agency’s own website and testimony before the Subcommittee on Oversight that the backlog may be even worse than advertised.

On July 26, 2023, one day before the Oversight Subcommittee’s ERTC hearing, the IRS issued a press release claiming that the ERTC backlog of valid claims had been cleared. Yet, the IRS’ own website noted that as of late July, there were still nearly 500,000 Forms 941-X that needed to be processed, and as of August 16, 2023, the figure increased to approximately 521,000,” wrote Chairmen Smith and Schweikert. “The September 5, 2023 statement also began by claiming the previous ERTC backlog had been cleared. It is concerning that the agency claimed a false victory over a backlog that has not been resolved.

The July 27 hearing also revealed that the ERTC backlog figure undercounts how many claims have yet to be processed. When the President and CEO of the National Association of Professional Employer Organizations (NAPEO) was asked, ‘Do you think that the way the IRS calculates the number of unprocessed ERTC claims is accurate?’ he responded: ‘Well no because…a small PEO [Professional Employer Organization] may have a hundred claims with the IRS; large PEOs may have tens of thousands of claims. Each PEO is counted as one.’ The IRS’s inaccurate counting method clouds the scope of the backlog. If each small business claim represented by the PEO who filed the claim was counted individually, the ERTC backlog figure would likely be much larger.

Additional Background:

  • Fraud in the ERTC program has become so prevalent that it earned a place on the IRS’s annual “Dirty Dozen” list of schemes and scams that make taxpayers vulnerable to personal and financial risk.
  • The Wall Street Journal reported in September that there has been $220 billion in ERTC payments thus far with another $120 billion lined up – six times higher than the original Congressional Budget Office estimate of $55 billion.

Read the full letter here.