The Government Accountability Office (GAO) has released a new report that emphasizes the ways in which federal policymakers and the White House should improve upon the federal response to the economic slump and the coronavirus epidemic. As part of this report, the GAO analyzed how the relief measures for businesses and people have operated until 2022. This analysis included information on tax refund applications that firms that took advantage of tax provisions in the CARES Act made to the Internal Revenue Service (IRS).
The CARES Act provided firms with several options to obtain additional liquidity in order to make it through the early stages of the pandemic and keep employees on the payroll. These options included the reinstatement of net operating loss (NOL) carrybacks, the creation of a new credit to incentivize keeping employees on the payroll, and the newly created Paycheck Protection Program (PPP), which provided forgivable loans through the Small Business Administration (SBA).
As of the 19th of October, the GAO reported that around 14,000 firms had sought for refunds of NOL or alternative minimum tax (AMT) carrybacks, and that two-thirds of the refunds were for amounts that were less than $100,000. On average, the Internal Revenue Service took forty days to process these refunds.
In addition, the Treasury Department reported in October that corporate tax refunds increased by approximately $5 billion for the fiscal year ending September 30th. This growth was significantly slower than what was anticipated by the Joint Committee on Taxation (JCT) in the spring. The fiscal year ended on September 30th. According to estimates provided by JCT, the provisions of the CARES Act pertaining to the carryback of corporate NOLs would result in the generation of about $80 billion in refunds.
Because of the difficulties involved in administration, the part of money that may be refunded for NOL refunds has been restricted. In order to help firms get around IRS mail backlogs, the Internal Revenue Service (IRS) has begun accepting provisional refund claims by electronic fax in addition to paper ones. On the other hand, many firms have already submitted a Form 1040 through paper, which means that they are unable to submit an updated return by e-file (a Form 1040-X) in accordance with the guidelines that are now in effect from the IRS.
The requirement to file a paper amended return holds down a company’s ability to obtain a provisional refund since the Internal Revenue Service is still working to catch up with a mail backlog caused by decreases in on-site operations earlier this year as a result of the epidemic. The Government Accountability Office (GAO) describes it this way: “Without the timely processing of paper-filed Forms 1040-X, certain taxpayers’ Forms 1045 would be kept “in suspense,” and their CARES-Act-related NOL refunds cannot be granted.” Once the IRS backlog has been cleared, it is feasible that the amount of NOL take-up will increase from the current $5 billion, however it is possible that it will not reach the $80 billion that JCT anticipated it would reach in the spring.
Interaction effects with other elements of the tax legislation are still another possible explanation for why NOL refunds were capped at their previous levels. The process of requesting a carryback of NOLs lowers taxable income, which might have repercussions for the interaction of other tax advantages. As the year continued, the United States economy rebounded more quickly than had been anticipated at the beginning of the year. As a result, the requirement for certain firms to carry back their current NOLs or minimize fresh losses in 2020 may have been lessened as a result.
A similar low level of credit was observed for the employee retention tax credit, with around 26,600 firms submitting claims for a total of approximately $4.5 billion in benefits. Because employers were not authorized to claim the credit if the business took out a loan through the PPP, there was little uptake of the employee retention credit. This was one of the reasons why the credit had limited take-up. In addition to allowing firms to keep staff on the books, the PPP also allowed firms to cover expenditures that were not related to payroll, which contributed to the PPP’s increased popularity among businesses.
Whether the limited take-up of tax refunds for NOL carrybacks or other tax credits was due to administrative challenges, the complexity related to determining whether it is worth taking advantage of the relief, or an unexpected upturn in economic conditions, policymakers should consider finding ways to simplify the administration of relief during future crises. This includes finding ways to reduce the complexity related to determining whether it is worth taking advantage of the relief. This will assist to guarantee that the aid is delivered at the appropriate time and to the appropriate people, both of which are essential components of any successful relief package for this crisis or for crises in the future.
The Report of the National Taxpayer Advocate Offers a Road Map to Making Pandemic Relief Provisions More Straightforward
Erin M. Collins, the National Taxpayer Advocate, delivered her first report to Congress last week. In it, she discussed the difficulties that taxpayers have encountered as a result of the coronavirus pandemic. She also discussed the changes that have been made to tax laws as a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. According to the conclusions of the National Taxpayer Advocate, policymakers should give top priority to making tax relief for people and businesses as simple as possible in the subsequent wave of relief.
The report by the National Taxpayer Advocate, which was published on the 29th of June, found that despite the significant relief to struggling firms and individuals that Congress provided in the CARES Act, many of these taxpayers have had difficulty navigating the various tax provisions. This was found to be the case despite the fact that the CARES Act was passed.
The Internal Revenue Service (IRS) had to implement operational changes in order to adapt to the pandemic caused by the coronavirus, which resulted in the closure of many in-person offices and a part in the accessibility of many taxpayer services. This was a significant contributor to the difficulties that taxpayers encountered this spring. This precluded people, for example, from discussing tax matters with a representative of the Internal Revenue Service.
In a similar vein, the Internal Revenue Service (IRS) was behind on processing tax returns for 2019 and distributing refunds at the end of March, but it has recently resumed those activities. The pandemic had an effect on audits and correspondence examinations as well. Comparing the first of April to the first of June in 2019 to the same time period in 2018, tests dropped by 65% between those two dates.
The majority of the Internal Revenue Service’s time this spring was taken up by the administration of direct payments for individual relief, which are referred to as recovery rebates within the CARES Act. As of the 3rd of June, around 160 million people have been awarded a total of approximately $267 billion in economic impact payments. Those who had provided the Internal Revenue Service with their direct deposit information were able to get their payments more promptly than those who did not file taxes or who were recipients of government benefits such as Social Security, who had to wait far longer.
Although the new “Find My Payment” and direct deposit information tools helped make the administration of the rebates more streamlined, some people are still having issues with their payments. These issues include errors concerning the number of children who are eligible for the rebates as well as payments being sent to the incorrect bank accounts.
Firms who were seeking liquidity as a result of the CARES Act’s tax reforms have also been met with obstacles. For instance, the CARES Act permitted firms to roll some net operating losses (NOLs) back five years to tax years that were recorded in 2018, 2019, and 2020 respectively. The Internal Revenue Service (IRS) granted firms a six-month delay to file an application in order to get a refund for a NOL carryback for the tax years 2018 and 2019, but stipulated that these applications must be sent in through fax. At this point, at least 133 firms have reported that they have received more than $5 billion in NOL refunds, and it is probable that more will follow as firms compensate for losses in 2020.
The computation of NOL carrybacks may be straightforward for certain firms, but the complexity of applying NOL principles to overseas revenue, particularly money that has been repatriated in accordance with Internal Revenue Code Section 965, may lead to confusion for a great number of firms. The IRS has published extensive information in the form of frequently asked questions (FAQs), but they are not regarded to be legally enforceable standards. The Taxpayer Advocate suggested to the Internal Revenue Service (IRS) that “the IRS also consider giving further guidance in a binding and official way” due to the fact that many of the refunds would be complicated and substantial.
In a similar vein, firms struggled with the employee retention credit (ERC), which allows for a tax credit of up to fifty percent of qualified wages, including health plan expenses, up to a maximum of fifty thousand dollars per employee between March 12, 2020 and January 1, 2021. However, this credit is only available for a period of time between those two dates.
Firms who had to close their doors because of the epidemic were qualified for the employee retention credit, but it is still unclear how the Internal Revenue Service (IRS) would define a complete or partial suspension of operations by government order. For instance, it is uncertain whether or not firms who have been compelled to have workers work remotely have continued activities that are “similar” to their former operations as a result of the closure. As a result, it is unclear whether or not these firms are qualified for the credit. There are still other difficulties associated with the credit, such as the lack of clarity on the eligibility of firms to get the credit in the event that they incur expenditures connected to social distancing rules.
The sheer scale and extent of the tax reforms included in the CARES Act posed considerable administrative issues for the IRS. Despite some room for improvement, the agency has done well given all of the obstacles it has faced while having a large portion of its workforce work remotely. Because of this, it is even more vital that policymakers give simplicity the highest priority in the next wave of individual and company relief that is being debated this month.