House Republicans are pressing the IRS for answers on the employee retention tax credit

Rep. Jason Smith, R-Mo., speaks during a hearing on the House Oversight and Accountability Committee’s impeachment inquiry into U.S. President Joe Biden on September 28, 2023.

Jonathan Ernst | Reuters

House Republicans are pressing the IRS for answers after the agency paused processing new applications for a pandemic-era small business tax break.

Lawmakers expressed “ongoing concerns” about the Employee Retention Credit (ERC), which was introduced to support small businesses during the Covid-19 pandemic. The loan was worth thousands per employee and triggered a flood of amended tax returns, many of which were filed incorrectly after poor advice from specialist firms.

In one Letter to the IRS On Tuesday, House Ways and Means Committee Chairman Jason Smith, R-Mo., and Oversight Subcommittee Chairman David Schweikert, R-Ariz., asked for updates on the backlog of unprocessed ERC applications.

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“For a program plagued with a lengthy backlog, it remains to be seen what changes will be made during the moratorium to improve review measures for fraudulent claims while making processing time more efficient to reduce the backlog,” they wrote.

The letter asked several questions about the ERC program, including the number of unprocessed applications, a timeline for clearing the backlog, plans to improve processing of legitimate applications and more.

The IRS did not immediately respond to CNBC’s request for comment.

The backlog of unprocessed ERC applications

As of September 27, the total inventory of unprocessed Forms 941-X used to amend an employer’s quarterly federal tax return was approximately 779,000. according to the IRS.

However, the backlog of ERC applications can be significantly higher because professional employer organizations (PEOs) provide payroll and other HR services. A single PEO lawsuit can be a game-changer for many small businesses, according to Pat Cleary, president and CEO of the National Association of Professional Employer Organizations, who testified at a House hearing in July.

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“That was the Hundred Years’ War for us,” Cleary told CNBC. “There are a lot of small businesses waiting for money.”

The IRS announced in July that it was slowing processing refunds with ERC applications due to the “complexity of the modified refunds” and the increase in companies enticing ineligible small businesses to claim the credit.

“The IRS knows who we are,” said Cleary, who urged the agency to clear PEO claims from the backlog of questionable applications. “These are established companies with long-term relationships.”

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