IRS Struggles with Errors in Processing Pandemic Tax Credit Claims

The IRS's first major batch of rejected claims for a controversial pandemic-era tax credit includes clear mistakes by the government, according to tax advisers. The agency is struggling to distinguish between legitimate refund requests and fraudulent ones. In July, during the initial test of their new sorting system, the IRS disallowed 28,000 tax-credit claims, targeting the easiest pending refunds to analyze and reject. Meanwhile, some taxpayers are receiving refunds after a long wait.

Several tax professionals reported that IRS denial letters mistakenly stated that employers were not operating during the pandemic because they did not file separate business tax returns, even though they were indeed in business. Other letters incorrectly claimed that businesses did not experience the required decline in gross receipts, using annual data instead of the quarterly data needed to determine eligibility.

"When errors occur in what is intended to be the easiest claims to identify and reject, concern is through the roof," said Justin Elanjian, an accountant at Stout in Atlanta.

These reported IRS errors highlight the agency's challenges as it works through a backlog of 1.4 million tax returns, continuing the saga of the employee-retention tax credit (ERC). Congress created the ERC program in 2020 to help businesses stay afloat and retain workers, but it has been plagued by widespread fraud, ineligible claims, and aggressive marketing. The IRS halted processing new claims in September 2023.

Click here to read more in depth on the Wall Street Journal.