The IRS’s handling of a COVID-era tax credit ranks as the agency’s most serious problem, hurting “countless eligible businesses,” a government watchdog says.
Applications piled up while IRS offices were shut down during the pandemic. Making the backlog worse, the agency hit the brakes on reviewing claims, based on “anecdotal” fears that a large percentage of claims might be fraudulent, Collins’s report said.
Although the IRS has processed 3.6 million claims, many businesses were left waiting as they obtained loans and paid interest on them. Some were forced to close their doors. Many remain in limbo as concerns about further complications continue to swell.
The report urges immediate action. But experts and business owners who spoke to The Epoch Times say much damage has already been done.
They say the program is widely misunderstood, unfairly maligned, and has become a political football. They worry about the future of affected businesses while remaining hopeful that the IRS will comply with Collins’s recommendations.
Her agency’s report says that “complex and nuanced rules” complicate the program.
“The [Employee Retention Credit] was meant to be a lifeline for businesses and nonprofits battered by the pandemic. Instead, for many, it has become a source of confusion and hardship,” the report says.
“This issue is not just about processing claims—it is about fulfilling a promise to American businesses and communities while protecting against fraud. The time for action is now. Businesses can’t wait any longer.”
The report makes 10 recommendations, including prioritizing economic hardship cases, handling disputed denials fairly, and improving communication with applicants.
The IRS did not respond to The Epoch Times’ request for comment.
As of last October, the agency was trying to get through a backlog of 1.2 million unprocessed claims.
IRS procedures instruct employees to answer inquiries about this tax credit by saying, “We cannot provide any additional information at this time as to the status or timeframe for processing [your form]", the report says.
Joe Merenda, the owner of a landscaping service near Rochester, New York, attests to that.
Merenda provided The Epoch Times with documentation showing that he began seeking the credit in December 2022.
This includes dozens of emails from an Iowa-based firm acting on his behalf. Merenda has contacted the IRS directly, too. No one would say when his expected check for more than $97,000 might arrive, he said.
Huge Impact, Much Confusion
Stories like his abound across the nation. But few people outside of specialized professional circles truly understand this program and its massive impact, said Dean Francis, a Virginia tax-credit consultant who works with small and medium-sized businesses.“The IRS has to pay interest on all of this.”
He said he thinks that could cost an extra $7 billion or more.
The IRS has already issued $242 billion through the program and paid an estimated $8.1 billion in interest because of the delays, the advocate’s report said.
Other costs could come from a spate of lawsuits over the IRS’s alleged mismanagement of the Employee Retention Credit.
Francis is working with the HIRE Coalition—a nonprofit organization dedicated to improving employment-related tax policy—to correct misconceptions about the tax-credit program.
Large companies routinely benefit from tax credits, and they employ specialists who understand them. That’s generally not the case with smaller businesses.
When the Employee Retention Credit came along, people of all political stripes heralded it as “the first time a very lucrative credit was made available to small employers,” Francis said, but “everything that could go wrong went wrong.”
Under the program, businesses could seek up to $26,000 per employee, but typically were awarded $10,000 to $20,000 per worker. Thus, if a company employs 100 people, the credit could be worth $1 to $2 million.
Lack of Awareness, Lots of Misconceptions
In addition, very few smaller businesses were aware of the program. Those who did hear about the Employee Retention Credit suspected that it sounded too good to be true.These circumstances were ripe for “bad actors and scammers” to take advantage of desperate business owners, the Taxpayer Advocate Service said. Some launched aggressive marketing campaigns.
However, this action was based on “anecdotal information,” the advocate’s report said, adding it was “unclear how the IRS could make this assertion,” given that an erroneous return is not necessarily a fraudulent one.
The IRS’s news release fueled beliefs that fraudulent use of the program was rampant. A flurry of publicity followed, with headlines trumpeting that the program was “awash” in fraud.
Against this backdrop, qualified professionals faced an uphill battle providing accurate information about the Employee Retention Credit. Even so, relying mostly on referrals from other business pros, not advertising, the HIRE Coalition helped more than 100,000 employers file for the tax credit, Francis said.
The group’s professionals who specialize in the credit and work with tax attorneys “are incredibly conscientious people who are not about to risk their reputation by signing their name to a tax form if it’s not accurate, compliant, and well-documented,” he said.
They normally charge fees ranging from 10 percent to 20 percent of the amount they help clients secure, Francis said.
The taxpayer advocate said it was understandable for the IRS to temporarily pause claims to develop better methods for separating ineligible or fraudulent claimants from deserving ones. But the agency should not have kept taxpayers waiting “indefinitely,” the report said.
At the time of the 2023 moratorium, some businesses were still learning about the credit and struggling with the pandemic’s aftereffects. So, claims were continuing to be filed.
Employers were allowed to file claims until April 15 this year, provided they met the criteria for the impact of the 2020–21 COVID restrictions.
Further Complications
In recent months, several members of Congress have gone on the attack against the program and its supporters. They have proposed that the IRS refuse to process claims filed after Jan. 31, 2024, based on the premise that those claims were likely fraudulent.Francis said that this belief is mistaken. Many qualified business owners had received bad advice that made them believe they were ineligible for the credit when, in fact, they met the requirements, he said.
In addition, employers were barred from applying for this tax credit until they had received confirmation that their loans had been forgiven under the COVID-era Paycheck Protection Program. Thus, many potential applicants were forced to delay filing for the credit.
Francis prepared a report for congressional offices showing that the fraud rate for the Employee Retention Credit is lower than for other tax-credit programs. He said too many decisions have been made based upon “the old narrative” that the program was rife with fraud.
In 2023–24, the IRS allowed people to withdraw potentially fraudulent or erroneous claims, but fewer than 12,000 people did so. And, amnesty programs that allowed businesses to pay back money received for invalid claims drew fewer than 3,000 responses, the IRS told the taxpayer advocate. This suggests that the vast majority of claims were filed in good faith, Francis said.
The IRS shifted to a “risk-scoring” computer analysis and deemed 28,000 claims as improper “before anyone in the IRS requested supporting documentation, laid eyes on the case, or considered the specific facts and circumstances,” the taxpayer advocate’s report said.
“Although this hands-off approach may have been easier for the IRS up front,” it has created more problems, including uncertainty over how to appeal these rejections, the report said.
More Concerns Loom
In early 2025, Miller & Chevalier—a Washington law firm focusing on tax, government, and business cases—reported that the Employee Retention Credit remained “a sore spot for taxpayers and the IRS.”A moratorium on processing claims filed after Jan. 31, 2024—the cutoff date some Congress members had sought—remains in place, the law firm said, as lawsuits against the IRS mount.
The national taxpayer advocate recommends that the IRS process all pre-2024 claims before the end of this month and says claims pending for more than six months should be finished by July 31.
In addition, the advocate urged the IRS to “lift the moratorium” and process the most recent claims within six months after each was filed.
Attorney Tim Parrish, president of the HIRE Coalition, says he is concerned about the long-term implications for businesses.
If Congress retroactively repeals claims going back to the end of January 2024, businesses and nonprofits will have “the rug pulled out from underneath them,” Parrish told The Epoch Times.
Some businesses made investment and hiring decisions based on those anticipated funds, and could be faced with finding other ways to cover those costs, he said.
“If they’re unsure if the claim will get processed, they may not invest—and we need as many investments as possible,” he said.
“There is another longer-term issue beyond [Employee Retention Credit] delays.”
The IRS’s handling of this program likely “will put a chill on future stimulus programs to the point where small businesses and nonprofits may not be willing to participate,” he said.
