The Employee Retention Tax Credit: Why Is My Refund Taking So Long?

We have written previously regarding the employee retention tax credit (the “ERC”).  The ERC was created by the Coronavirus Aid, Relief, & Economic Security Act (the “CARES Act”) and was expanded by the Consolidated Appropriations Act, 2021 (the “Appropriations Act”) to provide a tax credit on a per-employee basis if employers had a sufficient reduction of revenue or had a partial or complete shutdown based on a civil authority order.

To date, we have worked with more than 100 banks and other employers in their efforts to obtain an ERC.  Although the Internal Revenue Service (the “IRS”) has not denied any such party the receipt of the tax credit, in the vast majority of cases, the clients have not yet received the funds. 

At the end of May, the IRS explained the cause of the delays and also the status of the backlog.  The two main culprits are:  (1) the changes in procedures at the IRS to address COVID-19 safety protocols, including working remotely, and (2) the sheer volume of refund requests.  The processing relates to Form 941, the employer’s quarterly tax return, and Form 941-X, the adjusted employer’s federal tax return or claim for refund (an after-the-fact claim).

The IRS notes that, as is the case with:

“[m]any businesses in the United States, the IRS has also been impacted by COVID-19, which has caused delays in [its] services.  These delays have impacted the IRS processing mail, tax returns, payments, refunds and correspondence.  This has caused many businesses that filed for the ERC to experience a longer than anticipated tax refund.”

The IRS has noted that they are now opening their mail within the normal time frame.  Nonetheless, the change in procedures, as well as the volume of requests, have created a long backlog.  The IRS noted that as of May 6, 2021, it had approximately 200,000 Form 941s received for years prior to 2021 in the processing pipeline.  Adding 2021 returns, however, the number of unprocessed 941s (which, again, in IRS speak includes the 941-X) swells to 1.9 million unprocessed claims.

The IRS is taking steps to speed up the process. For instance, it is re-routing tax returns from IRS offices that are further behind to those that have more staff availability.  The IRS is taking the returns in the order that they are received. Accordingly, the refunds from 2020 and before will be processed before the 2021 returns.  The IRS provided a phone number to call with questions. The number is (877) 777-4778. Our experience is that calling the IRS phone number results in extremely lengthy delays. The IRS noted that employers need not take further action.  The IRS even requested that “employers do not contact the IRS about the return status.”

Although one of the aims of the ERC was to provide funds to offset costs related to employees (and thereby to maintain jobs), the inevitable staffing shortfall (like what was experienced with the SBA as a result of the Paycheck Protection Program) means that employers will unfortunately not receive the funds until well after the crisis has abated.  Nonetheless, the IRS delays should not cause employers who are entitled to the tax credit based on their reporting positions to hesitate to pursue such funds.