Hundreds of government entities wrongly claimed tax credits

Over 500 government entities improperly applied for advance payments of employer tax credits last year during the COVID-19 pandemic and needed to repay them, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, found 113 government entities as of Sept. 23, 2020, that were not eligible for the employer tax credits they claimed, totaling $2 million. The IRS later identified another 420 government entities that received $7.2 million in erroneous employer tax credits and is working on reversing the credits. The IRS has now put in place processes and procedures that will help it identify erroneous employer tax credit claims from government entities.

The IRS was largely successful in implementing the various forms of tax relief passed by Congress last year to offer help to individuals and employers dealing with the pandemic. Those provisions included the Employee Retention Credit, the Sick Leave Credit and the Family Leave Credit. However, under the CARES Act and the Families First Coronavirus Response Act that Congress passed in March 2020, most government entities weren’t eligible to claim them. Nevertheless, hundreds of government entities apparently tried to apply for the desperately needed aid.

Samuel Corum/Bloomberg

“When we brought these 113 entities to IRS management’s attention, they indicated that they have sent 63 of the 113 entities to the Tax Exempt and Government Entities Division to determine eligibility and, as of Dec. 17, 2020, began the process of reversing the erroneous credits,” said the report. “The remaining 50 entities were subsequently determined to have erroneous credits, and the IRS is working to reverse these credits. As of Dec. 17, 2020, the IRS identified an additional 420 government entities that received $7.2 million in erroneous employer tax credits and are working to reverse the credits. As a result, the IRS has implemented processes and procedures to continue to identify erroneous employer tax credit claims associated with government entities.”

The report credited the IRS with making employers aware of the tax credits and processing them swiftly. In response to the enactment of the CARES Act and the Families First Act, the IRS initiated an educational campaign to promote the availability of the tax credits to employers; developed Form 7200, Advance Payment of Employer Credits Due to COVID-19; and developed processes and procedures to allow employers to ask for an advance payment of the employer tax credit even though the IRS’s own tax processing centers were closed due to the pandemic. The IRS began processing Forms 7200 at the end of April 2020, and as of mid-October it had processed 10,163 Forms 7200 and issued over $583 million in employer tax credits.

“We are proud of the significant actions we executed in a short time to effectively implement multiple and broad legislative tax changes,” wrote De Lon Harris, commissioner of the IRS’s Small Business/Self-Employed Division’s Examination unit. “We maintained a dual focus on customer service and compliance, while simultaneously dealing with the pandemic’s impacts on our own workforce.”