While the IRS complied with COVID-19 relief legislation to give tax breaks to employers who provided paid sick and family leave and retained employees, the Government Accountability Office (GAO) said in a new report that the tax agency could benefit from strengthening its compliance plans for those tax provisions.
The CARES Act – and other COVID-19 legislation like it— featured provisions to establish paid sick and family leave credits, the Employee Retention Credit (ERC), and payroll tax deferrals, which GAO said that IRS implemented despite facing some delays.
“Leave credits and ERCs for 2020 totaled about $20.7 billion. Payroll tax deferrals totaled about $123.6 billion … In addition, preliminary data indicate 2021 usage of leave credits and ERCs likely exceed 2020 usage,” GAO states in its report.
GAO reported that IRS has taken steps to identify and plan for compliance risks associated with leave credits and the ERC, but said that making a comprehensive compliance plan would assist IRS efforts in ensuring it adequately identifies and addresses compliance risks.
“In preliminary data, GAO found 337 filings, totaling $100 million, from employers that were established in April 2020 or later, but then stopped filing employment tax returns. IRS screening filters flagged more than 65 percent of these filers for review,” wrote GAO. “However, those controls may still overlook ineligible entities because they do not consider certain factors, such as refund amounts and employer establishment dates.”
GAO made five recommendations for IRS, two of which the agency agreed to, and three that it did not:
- IRS should develop an integrated project management plan for the COVID-19 credits to improve its ability to manage and plan compliance efforts related to the credits;
- The agency should document the processes being used to address compliance risks associated with the ERC and leave credits;
- IRS should document the processes being used to address compliance risks associated with the ERC and leave credits that rely on wages that cannot be used for other tax credits;
- IRS should implement additional controls to identify tax credit recipients who may be ineligible employers; and
- The agency should update and implement post-filing compliance or examination activities to address potentially invalid or inaccurate employer credit refund claims not prevented by internal controls.
IRS agreed with recommendations two and three, but disagreed with the remaining recommendations.