TIGTA Report 2021-46-043 — Implementation of Tax Year 2020 Employer Tax Credits Enacted in Response to COVID-19

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Summary

A final audit report of the Treasury Inspector General for Tax Administration, Report Number 2021-46-043, issued July 9, 2021, assessing the Internal Revenue Service's actions to ensure the validity of employer tax credit claims enacted in response to the pandemic. The report states the IRS began processing Form 7200 advance payment requests on April 28, 2020, and had processed 10,163 forms and issued over $583 million in employer tax credits as of October 16, 2020. TIGTA reviewed 9,459 advance payment requests and identified processing errors on 17 Forms 7200 with incorrect credits totaling $83,806. It also reports 317 potentially fraudulent employer tax credits of about $94.2 million on Tax Year 2020 Forms 941 that processing did not identify, and 113 government entities that claimed $2 million in credits while ineligible. TIGTA made no recommendations.

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Implementation of Tax Year 2020 Employer Tax Credits 
Enacted in Response to the COVID-19 Pandemic 
 
 
July 9, 2021 
 
Report Number:  2021-46-043 
 
 
 
 
 
 
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined 
to be restricted from public release has been redacted from this document. 
TIGTACommunications@tigta.treas.gov   |   www.treasury.gov/tigta 
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION 

HIGHLIGHTS:  Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic  
Final Audit Report issued on July 9, 2021 
Report Number 2021-46-043 
 
 
Why TIGTA Did This Audit 
In June 2020, TIGTA issued an 
interim report providing 
preliminary results of the IRS 
efforts to implement business tax 
provisions included in 
Coronavirus Disease 2019 
(COVID-19) relief legislation.  
This report is a continuation of 
our review of the IRS’s 
implementation of business tax 
provisions included in legislation 
passed in response to the 
pandemic.  The overall objective 
of this review was to assess the 
IRS’s actions to ensure the validity 
of employer tax credit claims as 
well as the accuracy of the 
employer reconciliations of 
advance payments. 
Impact on Taxpayers 
In response to the enactment of 
legislation, the IRS initiated an 
educational campaign to promote 
the availability of the various 
credits to employers; developed 
Form 7200, Advance Payment of 
Employer Credits Due to 
COVID-19; and developed 
processes and procedures to 
enable employers to request an 
advance payment of the employer 
tax credit even though the Tax 
Processing Centers were closed.  
The IRS started processing 
Forms 7200 on April 28, 2020.  As 
of October 16, 2020, the IRS had 
processed 10,163 Forms 7200 and 
issued over $583 million in 
employer tax credits.   
 
 
 
 
 
 
What TIGTA Found 
Our review identified that the expediency required to implement this 
much-needed relief to employers did not allow for the development 
of the complex systemic verifications, including prerefund controls 
(e.g., electronic business rules).  As such, the IRS established 
procedures to manually review and process Forms 7200.  Our review 
of 9,459 advance payment requests received as of June 4, 2020, 
determined that the IRS accurately processed most of these requests.  
TIGTA identified processing errors on 17 Forms 7200 with incorrect 
credits totaling $83,806.  The errors included forms processed more 
than once; forms involving a government entity, which does not 
qualify; and forms that claimed an amount over the allowable 
threshold.  The IRS was able to initiate actions to ensure that the 
taxpayers’ accounts reflect the correct amount of employer tax 
credits.   
In addition, TIGTA identified that manual verification processes 
established to review the advance payments claimed on Form 7200 
******************2******************* of the credit claims on 
Forms 941, Employer’s QUARTERLY Federal Tax Return, during tax 
return processing.  ************************2*************************** 
****2****, our review of Tax Year 2020 Forms 941 processed with an 
employer tax credit as of October 1, 2020, identified a total of 
317 potentially fraudulent employer tax credits for approximately 
$94.2 million that were not identified during processing.  
Finally, TIGTA identified 113 government entities that filed a 
Tax Year 2020 Form 941 as of September 23, 2020, that were not 
eligible for the employer tax credits claimed totaling $2 million.  As of 
December 17, 2020, the IRS identified an additional 420 government 
entities that received $7.2 million in erroneous employer tax credits 
and is 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.       
What TIGTA Recommended 
TIGTA made no recommendations as the IRS addressed our concerns 
during the review. 
 

U.S. DEPARTMENT OF THE TREASURY 
WASHINGTON, D.C.  20220 
TREASURY INSPECTOR GENERAL 
FOR TAX ADMINISTRATION 
 
 
 
July 9, 2021 
 
 
MEMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE 
 
FROM: 
Michael E. McKenney 
 
Deputy Inspector General for Audit 
 
SUBJECT: 
Final Audit Report – Implementation of Tax Year 2020 Employer Tax 
Credits Enacted in Response to the COVID-19 Pandemic  
(Audit # 202040633) 
 
This report presents the results of our review to assess the Internal Revenue Service’s (IRS) 
actions to ensure the validity of employer tax credit claims as well as the accuracy of the 
employer reconciliations of advance payments.  This review is part of our Fiscal Year 2021 audit 
coverage of the IRS’s response to the coronavirus pandemic and addresses the major 
management and performance challenges of Responding to the COVID-19 Pandemic and 
Implementing Tax Law Changes. 
Management’s complete response to the draft report is included as Appendix IV. 
Copies of this report are also being sent to the IRS managers affected by the report information.  
If you have any questions, please contact me or Russell P. Martin, Assistant Inspector General for 
Audit (Returns Processing and Account Services). 
 
 

 
 
Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
Table of Contents 
Background .....................................................................................................................................Page 1 
Results of Review........................................................................................................................Page 6 
*************************2************************ 
*******2****** Identify Potentially Erroneous or 
Fraudulent Employer Tax Credits Claimed on 
Employment Tax Returns ..................................................................................................Page 7 
Processes Are Being Implemented to Ensure That 
Employers Receiving Advance Employer Tax Credits File 
Their Required Employment Tax Return .....................................................................Page 9 
Appendices 
Appendix I – Detailed Objective, Scope, and Methodology ................................Page 11 
Appendix II – Outcome Measures .................................................................................Page 13 
Appendix III – Form 7200, Advance Payment of Employer Credits 
Due to COVID-19 .................................................................................................................Page 16 
Appendix IV – Management’s Response to the Draft Report .............................Page 17 
Appendix V – Abbreviations.............................................................................................Page 22 
 

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
Background 
On March 18 and March 27, 2020, respectively, the President signed into law the Families First 
Coronavirus Response Act (FFCRA)1 and Coronavirus Aid, Relief, and Economic Security (CARES) 
Act.2  Provisions contained in the FFCRA and CARES Act provide businesses impacted by the 
Coronavirus Disease 2019 (COVID-19) pandemic with three new employer tax credits – the Sick 
Leave Credit, the Family Leave Credit, and the Employee Retention Credit.  In addition, the 
CARES Act provides employers with the ability to defer payment of their portion of the Social 
Security tax.  The employer tax credits apply to employee retention wages paid between 
March 13, 2020, and June 30, 2021, and wages paid for periods of leave between April 1, 2020, 
and March 31, 2021.  Employers and self-employed individuals deferring the employer share of 
Social Security tax generally must repay half the deferral by December 31, 2021, and the other 
half by December 31, 2022.  
Families First Coronavirus Response Act  
The FFCRA provides refundable tax credits3 to employers with fewer than 500 employees that 
reimburse them, dollar for dollar, for the cost of providing paid sick and family leave wages to 
their employees for leave related to COVID-19.  Employees may receive up to 80 hours of paid 
sick leave to care for their own health needs or to care for other family members.  Also, the 
employee may receive up to 10 weeks of paid family leave to care for a child whose school or 
place of care is closed or whose child care provider is unavailable due to COVID-19 precautions.  
Certain self-employed individuals in similar circumstances are entitled to similar credits.   
To qualify for the credits, employers must be a nongovernmental entity and provide and pay 
qualified sick or family leave wages, defined in the FFCRA, for periods of leave between 
April 1, 2020, and March 31, 2021.  Specifically, an eligible employer that pays qualified leave 
wages to its employees in a calendar quarter before it is required to deposit Federal 
employment taxes with the Internal Revenue Service (IRS) for that quarter may reduce the 
amount of Federal employment taxes that it deposits by the amount of the qualified leave 
wages paid.  The eligible employer must account for the reduction in deposits on Form 941, 
Employer’s QUARTERLY Federal Tax Return.  However, if there are insufficient Federal 
employment taxes to cover the amount of the credits, an eligible employer may request an 
advance payment of the credits from the IRS.  Figure 1 provides the requirements that need to 
be met to claim the Sick and Family Leave Credits. 
                                               
1 Pub. L. No. 116-127, 134 Stat. 178, as amended by the COVID-Related Tax Relief Act of 2020, Pub. L. No. 116-260, 
div. N, 134 Stat. 1182, 1964, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020, Pub. L. No. 116-260, 
div. EE, 134 Stat. 1182, 3051 (2020). 
2 Pub. L. No. 116-136, 134 Stat. 281, as amended by the COVID-Related Tax Relief Act of 2020 and the Taxpayer 
Certainty and Disaster Tax Relief Act of 2020 (2020). 
3 A refundable credit is a credit to reduce a tax liability.  If the tax liability is reduced to zero and a credit remains, it is 
eligible to be refunded to the taxpayer.   

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
Figure 1:  Requirements for the Sick and Family Leave Credits 
Sick Leave Credit 
Family Leave Credit 
Qualified wages are limited to 80 hours or 10 days 
paid to an employee at the employee’s regular 
rate, or if higher, the Federal minimum wage or 
any applicable State or local minimum wages, up 
to $511 per day for the individual.  An employee 
caring for someone is eligible at two-thirds of the 
employee’s regular rate of pay, or applicable 
minimum wages, up to $200 per day.   
Qualified wages are limited to two-thirds of 
the employee’s regular rate of pay up to 
$200 per day per employee for up to 
10 weeks or 50 days of qualified wages paid 
to an employee who is unable to work.   
The IRS estimates the maximum credit allowed per 
employee is ***2***.4 
The IRS estimates the maximum credit 
allowed per employee is approximately 
***2***.5 
Employee must be subjected to Federal, State, or 
local government isolation order, requested to 
self-quarantine, experiencing symptoms and 
seeking a diagnosis, caring for an individual in 
isolation or self-quarantine, or caring for a child if 
the school or place of care is closed or is 
unavailable.   
Employee must be employed for a least 
30 calendar days and unable to 
work/telework due to the need to care for a 
child because their school or place of care 
has been closed or is unavailable.   
Source:  Summary of requirements in the FFCRA. 
As of February 25, 2021, the IRS processed 72,469 tax returns for Tax Year6 2020 claiming the 
Sick and Family Leave Credits totaling $2.8 billion.   
Coronavirus Aid, Relief, and Economic Security Act  
The CARES Act encourages eligible employers to keep employees on their payroll despite 
experiencing economic hardship related to COVID-19.  As such, the CARES Act created the 
Employee Retention Credit, which is a refundable credit against employment taxes.  The 
Employee Retention Credit is equal to 50 percent of qualified wages paid (including allocable 
qualified health plan expenses) between March 13, 2020, and December 31, 2020.  Additional 
legislation passed in December 2020 and March 2021 that increased the credit to 70 percent of 
qualified wages paid between January 1, 2021, and December 31, 2021.7  Certain government 
                                               
4 The maximum amount claimed may not exceed the maximum allowable per employee:  **************2************** 
**************************************************************2************************************************************* 
maximum per employee (approximately).  Note that Qualified Health Expenses is a conservative estimate, according 
to IRS management. 
5 The maximum amount claimed may not exceed the maximum allowable per employee:  **************2************** 
**************************************************************2************************************************************* 
maximum per employee (approximately).  Note that Qualified Health Expenses is a conservative estimate, according 
to IRS management. 
6 The 12-month accounting period for keeping records on income and expenses used as the basis for calculating the 
annual taxes due.  The tax year on quarterly employment tax returns includes each of the four quarterly returns filed 
during the calendar year.     
7 The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021.   

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
entities are not eligible for this credit, and self-employed individuals are not eligible for this 
credit with respect to their own self-employment earnings.   
To be eligible for the credit, employers must have a trade or business during Calendar Year 2020 
or during the calendar quarter for which they are claiming the credit in Calendar Year 2021 and 
either fully or partially suspends operation due to orders from an appropriate governmental 
authority limiting commerce, travel, or group meetings due to COVID-19 or experiences a 
decline in gross receipts during the calendar quarter.  For Tax Year 2020, the maximum amount 
of qualified wages taken into account with respect to each employee for all calendar quarters is 
$10,000, so that the maximum credit for an eligible employer for qualified wages paid to any 
employee is $5,000.  For Tax Year 2021, the maximum amount of qualified wages taken into 
account with respect to each employee for all calendar quarters is $10,000 per quarter, so that 
the maximum credit for an eligible employer for qualified wages paid to any employee is $7,000 
per quarter.8  An eligible employer that pays qualified wages to its employees in a calendar 
quarter before it is required to deposit Federal employment taxes with the IRS may reduce the 
amount of Federal employment taxes by the amount of the Employee Retention Credit it plans 
to claim.  However, if there are insufficient Federal employment taxes to cover the amount of the 
credit, an eligible employer may request an advance payment of the credit from the IRS. 
As of February 25, 2021, the IRS processed 102,422 tax returns for Tax Year 2020 claiming 
Employee Retention Credits totaling $4.5 billion. 
The CARES Act allows employers and self-employed individuals to defer the payment of 
their employer share of Social Security tax over the next two years. 
Generally, half of the deferral is required to be repaid by December 31, 2021, and the other half 
is due by December 31, 2022.  On August 8, 2020, the President issued a Presidential 
Memorandum9 directing the Secretary of the Treasury to expand the deferral to also include the 
employee’s portion of Social Security tax.10  Pursuant to Notice 2020-65, Relief With Respect to 
Employment Tax Deadlines Applicable to Employers Affected by the Ongoing Coronavirus 
(COVID-19) Disease 2019 Pandemic, employers could elect to defer payment and withholding of 
the employee portion of Social Security tax between September 1 and December 31, 2020, for 
employees with biweekly pay that was less than $4,000.  Under Notice 2020-65, the due date for 
withholding and paying the deferred tax was extended to April 30, 2021.11  Therefore, as of 
September 1, 2020, many employers could defer 100 percent of Social Security tax.    
                                               
8 The American Rescue Plan Act of 2021 modifies the Employee Retention Credit for the third and fourth quarters of 
Tax Year 2021, which will impact the maximum credit amount for some taxpayers.   
9 Federal Register, Vol. 85, No. 157, pp. 49587–49588, Deferring Payroll Tax Obligations in Light of the Ongoing 
COVID-19 Disaster (August 13, 2020). 
10 The IRS’s authority was established in the issuance of Notice 2020-65, Relief With Respect to Employment Tax 
Deadlines Applicable to Employers Affected by the Ongoing Coronavirus (COVID-19) Disease 2019 Pandemic 
(August 2020). 
11 Notice 2021-11, Additional Relief With Respect to Employment Tax Deadlines Applicable to Employers Affected by 
the Ongoing Coronavirus (COVID-19) Disease 2019 Pandemic (January 2021), makes changes to Notice 2020-65 to 
extend the payment period to December 31, 2021.   

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
As of February 25, 2021, we identified 152,739 employers that have deferred approximately 
$97.1 billion in Social Security tax.  As previously mentioned, this amount will need to be fully 
repaid by December 31, 2022.12 
Legislation passed in December 2020 and March 2021 modified provisions of the FFCRA 
and the CARES Act  
On December 27, 2020, the President signed into law the Taxpayer Certainty and Disaster Tax 
Relief Act of 2020 and the COVID-Related Tax Relief Act of 2020, which make changes to the 
new employer tax credits created in the FFCRA and CARES Act passed in March 2020.  Employers 
are eligible to continue to claim the Sick and Family Leave Credits for periods of leave provided 
through March 31, 2021, and the Employee Retention Credit through June 30, 2021.  The new 
legislation also retroactively clarifies language in the FFCRA and CARES Act.  For example, the 
legislation clarifies the treatment of group health plan expenses for purposes of the Employee 
Retention Credit.  Furthermore, the legislation retroactively modified the limitation that 
employers who received a Paycheck Protection Program13 loan could not also receive the 
Employee Retention Credit, thus allowing employers to both receive the loan and claim the 
credit under certain conditions.  Additionally, the new legislation extends the due date for 
employers to repay the employee share of the Social Security tax deferral from April 30, 2021, to 
December 31, 2021.  
On March 11, 2021, the President signed into law the American Rescue Plan Act,14 which also 
made changes to the employer tax credits in the FFCRA and CARES Act.  Employers are now 
eligible to continue to claim the Sick and Family Leave Credits for periods of leave provided 
through September 30, 2021, and the Employee Retention Credit through December 31, 2021.  
However, the requirements we analyzed in this review were not impacted by the subsequently 
signed legislations (e.g., government entity eligibility and credit thresholds).   
An interim Treasury Inspector General for Tax Administration (TIGTA) report provides 
preliminary results on IRS efforts to implement business tax provisions 
In June 2020, we issued an interim report providing preliminary results of the IRS efforts to 
implement business tax provisions included in relief legislation.15  We reported that, in response 
to the enactment of this legislation, the IRS initiated an educational campaign to promote the 
availability of these credits.  In addition, the IRS: 
• 
Developed the new Form 7200, Advance Payment of Employer Credits Due to 
COVID-19,16 to enable employers to request an advance payment of these credits.  Along 
with the development of the form, the IRS also developed processes and procedures to 
enable employers to submit these requests even though the Tax Processing Centers 
                                               
12 This amount includes the employee portion of Social Security tax due by December 31, 2021.   
13 The CARES Act established the Payroll Protection Program to help businesses retain their employees by offering 
potentially forgivable loans from Small Business Administration lenders for use to meet payroll needs and other 
business expenses.   
14 Pub. L. No. 117-2 (2021). 
15 TIGTA, Report No. 2020-46-041, Interim Results of the 2020 Filing Season:  Effect of COVID-19 Shutdown on Tax 
Processing and Customer Service Operations and Assessment of Efforts to Implement Legislative Provisions 
(June 2020).    
16 See Appendix III for Form 7200.   

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
were closed.  For example, the IRS implemented a process to enable employers to 
submit these requests via a dedicated E-fax line.  Once a Form 7200 is received 
electronically, it is routed to a dedicated group of IRS employees who review and process 
these requests.  Employers could begin to submit their Form 7200 starting April 1, 2020.   
• 
Revised Form 941, adding lines to account for the various employer tax credits (e.g., Sick 
and Family Leave Credits and Employee Retention Credit) and other tax relief (e.g., 
deferral of payroll tax) due to COVID-19.  Businesses will begin filing the revised 
Form 941 for their second quarter employment taxes due at the end of July 2020.  In 
addition, businesses that requested and received an advance payment by filing 
Form 7200 will record that amount on the revised Form 941 to determine whether they 
owe additional employment taxes or are due a refund.  See Figure 2 for excerpts from 
the revised Form 941 that employers will use to record the advance payment, employer 
tax credits, and Social Security tax deferral. 
Figure 2:  Form 941 Sections Used for Reporting Advance Payment,  
Employer Tax Credits, and Social Security Tax Deferral 
 
Source:  Excerpts from the TY 2020 Form 941, revised as of July 2020.      

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
This report is a continuation of our review of the IRS’s implementation of business tax provisions 
included in laws passed in response to the pandemic.  This review evaluates the IRS’s efforts 
from when we last reported in June 2020 through January 2021 and includes evaluations of 
credit claims from April 2020 to October 2020.  We have additional reviews to continue to 
evaluate the implementation of changes in eligibility requirements included in laws enacted 
subsequent to the FFCRA and CARES Act as well as assessing the IRS’s efforts to track and 
monitor employer repayment of Social Security tax deferrals.     
Results of Review 
Our review identified that the expediency required to implement this much-needed relief to 
employers ***************************************2************************************************ 
*****************************2****************************** the IRS established procedures to 
manually review and process Forms 7200, which it did beginning on April 28, 2020.  As of 
October 16, 2020, the IRS has processed 10,163 Forms 7200 and issued over $583 million in 
advance employer tax credits.  Figure 3 shows statistics on the Form 7200.   
Figure 3:  Form 7200 Statistics as of October 16, 2020 
 
 
Source:  IRS reports as of October 16, 2020. 
Manual review of Forms 7200 ensured that they were valid claims.  Our review of 
9,459 Forms 7200 received as of June 4, 2020, determined that the IRS accurately processed the 
majority of these forms.  We identified processing errors on 17 of the 9,459 Forms 7200, with 
incorrect credits totaling $83,806.  When we brought our concerns to IRS management’s 
attention, management agreed that tax examiners erroneously processed these claims.  These 
included **1** Forms 7200 processed more than once; **1** Forms 7200 involving a government 

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
entity, which does not qualify; and **1** Forms 7200 that claimed an amount over the allowable 
threshold.  Prior to our notifying IRS management, management had already developed 
processes to identify and adjust the Forms 7200 processed more than once.  This allowed the 
IRS to initiate actions to ensure that the taxpayers’ accounts reflect the correct amount of 
employer tax credits and plans to take actions to recover the funds erroneously paid.     
************************2************************ Identify 
Potentially Erroneous or Fraudulent Employer Tax Credits Claimed on 
Employment Tax Returns 
Our review identified that manual verification processes established to review the advance 
payments claimed on Form 7200 were ***********2************************************************ 
******************2********************.  For example, to ensure that Forms 7200 were valid 
claims, the IRS developed specific processes and procedures that included: 
• 
Additional research on ***************2**************** to determine the eligibility of the 
advance payment.  ***********************2************************************************* 
****************2****************** the Form 7200 relates, reviewers conduct research 
*******************************************2*********************************.     
• 
Ensuring that advance payments do not exceed the allowable amounts.  For example, the 
Form 7200 reviewers verify that employers claiming the Sick and Family Leave Credits 
*********************2********************** and the Employee Retention Credit *****2***** 
***************2************** listed on the Form 7200.17      
• 
Ensuring that advance payments to entities not entitled to the credits are rejected.  
Government entities are not eligible for the Sick and Family Leave Credits or the 
Employee Retention Credit.     
*****************************2************************************ our review of Tax Year 2020 
Forms 941 processed with an employer tax credit as of October 1, 2020, identified a total of 
317 tax returns with potentially fraudulent employer tax credits for approximately $94.2 million 
that were not identified during tax return processing.  Each of the questionable Forms 941 we 
identified *****************************************2************************************************ 
******************2*********************.  These 317 tax returns with potentially fraudulent claims 
include:  
• 
*******************************************1************************************************* 
*******************************************1**************************************,18 ***1**** 
*******************************************1************************************************* 
*******************************************1************************************************* 
*******************************************1************************************************* 
*******************************************1************************************************* 
                                               
17 The maximum Employee Retention Credit for each quarter was increased to $7,000 per employee for Tax Year 2021 
by the Taxpayer Certainty and Disaster Tax Relief Act of 2020.   
18 A unique nine-digit number used to identify a taxpayer’s business account.  

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
*******************************************1************************************************* 
*******************************************1******. 
• 
**1** Forms 941 with potentially fraudulent employer tax credit claims totaling over 
$1 million.  These tax returns were ******2************************************************ 
******************2*****************.  For example, claims were filed **********2********** 
**********************2************************************.  Management agreed with our 
concern and stated that they became aware of this scheme after reviewers of the 
Forms 7200 noted ***********************2************************************************ 
*****2****.  Management noted that they referred these tax returns to IRS Criminal 
Investigation for action.   
• 
**1** Forms 941 with potentially fraudulent employer tax credit claims totaling over 
$1.2 million.  These tax returns were ****2************************************************ 
*******************************************2************************************************ 
*******************************************2************************************************ 
*******2*******.  There were *1* Employee Retention Credits of over $735,000 and *1* Sick 
and Family Leave Credits of over $484,000.19  We shared these cases with IRS 
management, and they agreed that *1* Forms 941 warranted further review to determine 
if the employer fraudulently claimed Employee Retention or Sick and Family Leave 
Credits.  For the remaining *1* Forms 941, the IRS determined that *1* Forms 941 were 
not questionable and has not yet made a determination on *1* Forms 941.   
When we asked management why the verification/validation processes and procedures used for 
Forms 7200 *************************************2********************, they stated that, unlike 
Form 7200, *************************************2******************************.  As such, ****2**** 
**************************************************2************************************************.  
Moreover, the IRS ******************************2************************************************** 
*2* tax return filing season was already underway and *****************2***************** when 
the legislation was enacted.  In response to our bringing the above concerns to IRS 
management’s attention, the IRS **************2************************************************* 
*************************************************2**********************************************.  As 
of December 2020, the IRS has identified 41 additional tax returns **************2**************, 
however, per IRS review, the tax returns did not have similar characteristics and are being 
processed through normal procedures. 
The IRS created an identity theft filter to identify businesses that ********2******** 
*******2********* and may be filing a potentially fraudulent tax return   
In response to our bringing the above-mentioned erroneous claims to IRS management’s 
attention, the IRS developed and implemented a new identity theft fraud filter in 
September 2020 to identify, ******************2************************************************** 
*********************2********************.  As of October 22, 2020, this filter has identified 
110 potentially fraudulent tax returns with refunds totaling $1.7 million.  When a tax return is 
identified by the IRS, the refund will be stopped and a letter will be sent to the taxpayer 
requesting that they verify their identity.  Once the taxpayer *************2**************, the case 
may be sent to the Small Business/Self-Employed Division to *****************2****************** 
                                               
19 There are 22 tax returns that claimed both credits.   

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
*************************************************2**********************.  If the taxpayer *****2***** 
*************2*************, then the tax return is marked as confirmed identity theft.  As of 
November 4, 2020, the IRS has confirmed that 32 tax returns were valid and the remaining 
78 tax returns are awaiting a taxpayer response, with employer tax credits totaling $1.5 million.  
It should be noted that the Small Business/Self-Employed Division worked with various IRS 
functions to identify ******************************2*********************************.  At the time 
of our analysis, the IRS had not yet conducted research and/or analysis *************2************ 
**********************2************************. 
Ineligible entities were allowed to claim the COVID-19 employer tax credits in error 
Our review also identified 113 government entities that filed a Tax Year 2020 Form 941 as of 
September 23, 2020, that, per the FFCRA and CARES Act, are not eligible for the employer tax 
credits.  These entities received erroneous employer tax credits totaling $2 million.  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 December 17, 2020, began the process of reversing the erroneous credits.  
The remaining 50 entities were subsequently determined to have erroneous credits, and the IRS 
is working to reverse these credits.  As of December 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.    
Processes Are Being Implemented to Ensure That Employers Receiving 
Advance Employer Tax Credits File Their Required Employment Tax Return  
Our analysis of 5,524 employers who received advance payments for the second quarter of Tax 
Year 2020 (ending June 30, 2020) identified 3,655 employers (66 percent) who did not report the 
correct advance payment amount or did not file the required Form 941.  These include: 
• 
2,154 employers with advance payment discrepancies between what IRS tax accounts 
show were received as an advance payment and the amount reported on the 
corresponding employer’s Form 941.  Management noted that tax returns with 
discrepancies are systemically adjusted to reflect the amount of the advance payment 
listed on the filer’s tax account when the Form 941 is processed.  This will result in the 
IRS issuing a different refund than the amount reported on the Form 941 or the taxpayer 
needing to make a payment that is different than the amount reported on the Form 941. 
• 
1,501 employers with advance payments totaling $73.9 million that did not file a 
Form 941 or were included on another payer’s Form 941, Schedule R, Allocation 
Schedule for Aggregate Form 941 Filers.20  It should be noted that the IRS estimates, as 
of March 2021, show that there are approximately 938,000 second quarter 
Tax Year 2020 Forms 941 that still need to be processed.  As a result, the number of 
employers identified as not filing the required Forms 941 will likely change as the IRS 
                                               
20 At the time of our analysis, the IRS had not reconciled the Schedule R filers with advance payments; therefore, this 
population cannot be differentiated from the population of nonfilers.   

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
processes these tax returns and completes the reconciliation of the advance employer 
tax credits.   
Management noted they are implementing a compliance strategy *********2************ 
*******************************************2************************************************ 
*******************************************2************************************************ 
*******************************************2*************************************** the IRS 
has not yet contacted these taxpayers.    
 

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
Appendix I 
Detailed Objective, Scope, and Methodology 
The overall objective of this review was to assess the IRS’s actions to ensure the validity of 
employer tax credit claims as well as the accuracy of the employer reconciliations of advance 
payments.  To accomplish our objective, we: 
• 
Evaluated the IRS’s processes to ensure the validity and accuracy of advance payments 
paid to eligible employers, interviewed IRS management on the procedures to process 
Forms 7200, and analyzed Forms 7200 for validity and accuracy.   
• 
Evaluated the controls to track E-fax submissions and determined if adequate controls 
over forms exist.   
• 
Assessed the process to reconcile Forms 7200 with Forms 941 to ensure that advance 
payments are properly credited to the taxpayer’s account.  We compared the advance 
employer tax credit claims reported on Forms 941 with the amounts on Forms 7200.    
• 
Reviewed the IRS’s plans for implementing CARES Act § 2302, Delay of payment of 
employer payroll taxes. 
Performance of This Review 
This review was performed with information obtained from the Small Business/Self-Employed 
Division’s Collection Policy office located in Atlanta, Georgia, during the period June 2020 
through March 2021.  We conducted this performance audit in accordance with generally 
accepted government auditing standards.  Those standards require that we plan and perform 
the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objective.  We believe that the evidence obtained 
provides a reasonable basis for our findings and conclusions based on our audit objective.   
Major contributors to the report were Russell P. Martin, Assistant Inspector General for Audit 
(Returns Processing and Account Services); Diana M. Tengesdal, Director; Jonathan W. Lloyd, 
Audit Manager; Jaclynne O. Durrant, Lead Auditor; and Kenneth L. Carlson, Senior Auditor. 
Validity and Reliability of Data From Computer-Based Systems  
During this review, we obtained extracts from the Business Master File1 for Tax Year 2020 for 
transaction codes, entity information, and credit information that were available on TIGTA’s Data 
Center Warehouse.2  We evaluated the data on the Data Center Warehouse by performing 
electronic testing of required data elements and reviewing existing information about the data 
and the system that produced them.  This includes taking judgmental samples3 of each dataset 
                                               
1 The IRS database that consists of Federal tax-related transactions and accounts for businesses.  These include 
employment taxes, income taxes on businesses, and excise taxes.   
2 TIGTA’s centralized storage of IRS data files.   
3 A judgmental sample is a nonprobability sample, the results of which cannot be used to project to the population. 

 
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Implementation of Tax Year 2020 Employer Tax Credits  
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and validating against IRS source data, i.e., IRS’s Integrated Data Retrieval System.4  We 
determined that the data used were sufficiently reliable for the purposes of this report. 
Additionally, we obtained statistics on Forms 7200 from the IRS.  We performed tests to assess 
the reliability of Form 7200 statistics.  We evaluated the data by (1) performing electronic testing 
of required data elements, (2) reviewing existing information about the data and the system that 
produced them, and (3) interviewing agency officials knowledgeable about the data.  We 
determined that the data were sufficiently reliable for purposes of this report. 
Internal Controls Methodology 
Internal controls relate to management’s plans, methods, and procedures used to meet their 
mission, goals, and objectives.  Internal controls include the processes and procedures for 
planning, organizing, directing, and controlling program operations.  They include the systems 
for measuring, reporting, and monitoring program performance.  We determined that the 
following internal controls were relevant to our audit objective:  procedures to review and 
process Forms 7200.  We evaluated these controls by reviewing the Internal Revenue Manual,5 
interviewing Form 7200 reviewers, and reviewing Form 7200 and Form 941 instructions. 
  
 
                                               
4 IRS computer system capable of retrieving or updating stored information.  It works in conjunction with a taxpayer’s 
account records.   
5 The primary, official source of IRS “instructions to staff” relating to the organization, administration, and operation of 
the IRS.  It details the policies, delegations of authority, procedures, instructions, and guidelines for daily operations 
for all divisions and functions of the IRS.   

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
Appendix II 
Outcome Measures 
This appendix presents detailed information on the measurable impact that our recommended 
corrective actions that the IRS has already implemented during our review will have on tax 
administration.  These benefits will be incorporated into our Semiannual Report to Congress. 
Type and Value of Outcome Measure: 
• 
Cost Savings (Funds Put to Better Use) – Actual; *******************1*********************** 
*******************************************1************************************************* 
**1** (see page 7). 
Methodology Used to Measure the Reported Benefit: 
The IRS established procedures to manually review and process Forms 7200; however, these 
procedures were not used to ensure the validity of the employer tax credit claims on Forms 941 
during tax return processing.  Using the IRS’s Business Master File data, our review of Tax 
Year 2020 Forms 941 processed with an employer tax credit as of October 1, 2020, identified 
**************************************************1************************************************** 
**************************************************2************************************************** 
**************************************************2********************************1***************** 
**************************************************1************************************************** 
**************************************************1************************************************** 
**************************************************1************************************************** 
********************1**********************.   
Type and Value of Outcome Measure: 
• 
Cost Savings (Funds Put to Better Use) – Potential; $1,506,831 in potentially erroneous 
employer tax credits processed on potentially erroneous Forms 941 (see page 7). 
Methodology Used to Measure the Reported Benefit: 
The IRS established procedures to manually review and process Forms 7200; **********2********* 
**************************************************2************************************************** 
***************2***************.  During Form 7200 processing, the IRS checks for entities not 
entitled to the employer tax credits, ************2************************************************** 
**************************************************2************************************.  We 
identified 128 potentially fraudulent employer tax credits on 103 Forms 941 processed using 
**************************************************2************************************************** 
**************2*************.  We shared our cases with IRS management, and they agreed that 
23 of 103 tax returns warranted further review to determine if the employer fraudulently claimed 
the employee tax credits.   
As a result, the IRS created a new identity theft filter in September 2020 to **********2*********** 
**************************************************2************************************************** 
*************************2************************.  The new filter has identified 110 potentially 

 
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Implementation of Tax Year 2020 Employer Tax Credits  
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fraudulent tax returns.  As of November 4, 2020, the IRS has confirmed that 32 tax returns were 
valid and the remaining 78 tax returns are awaiting a taxpayer response.  These 78 tax returns 
still in process have potentially fraudulent employer tax credits totaling $1,506,831.  The 
Small Business/Self-Employed Division worked with various IRS functions to **********2********** 
*********************2**********************.  At the time of our analysis, the IRS had not yet 
researched the pocket of ************************2******************************.   
Type and Value of Outcome Measure: 
• 
Cost Savings (Funds Put to Better Use) – Potential; $9,161,609 in potentially erroneous 
employer tax credits processed for government entities on the Form 941 (see page 7).1 
Methodology Used to Measure the Reported Benefit: 
The IRS established procedures to manually review and process Forms 7200; *********2********** 
**************************************************2************************************************** 
************2*************.  The FFCRA and CARES Act state that government entities are not 
eligible for the employer tax credits.  During Form 7200 processing, the IRS checks for entities 
not entitled to the employer tax credits, e.g., government entities.  **************2*************** 
*******************************2****************************.  As a result, our review of Tax 
Year 2020 Forms 941 processed with an employer tax credit as of September 23, 2020, identified 
113 government entities that filed Forms 941.  These entities claimed employer tax credits 
totaling $1,966,542.  We notified management of the 113 government entities, and 
management stated that, as of December 17, 2020, the IRS began the process to reverse the 
erroneous credits on 63 entities and agreed to take action on the remaining 50 entities.  
Additionally, the IRS identified 420 additional government entities that received $7,195,067 in 
erroneous credits and is working to reverse these credits.   
 
Management’s Response:  IRS management disagreed with the outcome measure, 
stating that the outcome incorrectly assumes that 100 percent of the entities cited are 
ineligible to claim employer credits.  Management also stated that the systemic 
programming to reject credits claimed by these taxpayers without a manual review may 
reject a valid, otherwise qualifying, entity entitled to the credits.  Systemically rejecting 
returns may unintentionally harm taxpayers by erroneously requiring them to contact the 
IRS to rectify the issue, delaying a refund or credit to which they are entitled and 
increasing burden.  Instead, the IRS has a process to identify taxpayers who have claimed 
a credit and appear to be ineligible entities and proposes disallowance of the credit in 
question.  This post-processing approach more appropriately balances compliance with 
the need to assist taxpayers during a pandemic.  Finally, management believed the 
outcome measure does not accurately reflect the potential impact of the TIGTA audit 
since it also includes returns identified by the IRS. 
 
Office of Audit Comment:  There is no incorrect assumption in our calculation 
of the outcome measure.  Each of the entities used to calculate the outcome 
measure was a government entity, and the IRS determined they were ineligible to 
claim the credit.  In addition, we disagree that a systemic process to reject these 
                                               
1 The outcome is based upon nearly $2 million TIGTA identified and $7.2 million the IRS identified after we brought 
the original cases to their attention.   

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
tax returns may unintentionally harm government entities identified as 
attempting to erroneously claim a credit.  In fact, the IRS’s post-processing 
approach significantly increases its cost to address these erroneous claims.  
Finally, the outcome measure includes those ineligible government entities that 
the IRS identified due to processes that were put in place in response to our 
identification of erroneous credits issued to ineligible government entities.  The 
IRS was in the process of developing a compliance strategy, which may have 
included identifying these tax returns, at the time of our notifying management 
of this issue.  
 

 
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Implementation of Tax Year 2020 Employer Tax Credits  
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Appendix III 
Form 7200, Advance Payment of Employer Credits Due to COVID-19 
 

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
Appendix IV 
Management’s Response to the Draft Report 
 
 

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
 
 
2 
 
In addition to developing the Form 7200 review process, the IRS also designed many 
systemic processes to limit errors and duplicate refunds. Specifically, we implemented 
programming that systemically reconciles the return filed with the dollar amount of 
advances paid, which ensures that duplicate payments are not made. Additional risk 
mitigations include a systemic refund hold filter that automatically applies when a 
significant discrepancy exists between the amount of advance credit reported by a 
taxpayer and the amount that was paid to the taxpayer. We also implemented  
processes to quickly review and release refund freezes after review completion. 
 
During filing, our programming systemically reverses any advances to liabilities that 
have been paid and offsets those liabilities against the credit reported on the taxpayer’s 
return. This systemic process recoups improper payments during filing and, if a balance 
is owed, generates the required notice. Additionally, in response to the legislation, we 
were evaluating incoming returns to identify filter updates to address fraudulent filings 
as TIGTA began its audit. Because TIGTA conducted this audit in real-time, we had not 
yet completed our analysis or the revision of our filters. We are confident that our 
recurring review efforts did and will continue to identify improvements during the 
development and completion of the implementation and compliance plans. 
 
We developed and implemented a process to reconcile third-party payers and the 
advance credits paid to their clients and other compliance actions. Development began 
in June 2020 and the first cases were identified and made available for reconciliation in 
August 2020. We also developed procedures to address advance credit recipients who 
did not file tax returns. Since August 2020 we have continually monitored advance 
recipients’ filing status and will place returns in the examination workstream when return 
processing for the period has completed. 
 
In addition to the extensive efforts noted above, the IRS developed post-processing 
compliance plans, which include the development and delivery of necessary training for 
our employees and revising employment tax examination report forms and associated 
tools to allow examiners to make appropriate adjustments to the credits claimed on the 
returns. 
 
Our Form 7200 advance process was a success, ensuring that taxpayers received 
critical funds they needed in these unprecedented times. We committed extensive 
resources to this important process, and we worked to ensure that these tax provisions 
were not abused by unscrupulous taxpayers by quickly analyzing incoming data as 
returns were filed. However, we disagree with TIGTA’s position that the IRS should  
have *********************************************2********************. The volume of 
employment tax returns is significantly higher than the volume of Forms 7200 which 
***************************************************2************************************************ 
****************2******************. This proposal would result in the improper rejection of 
many legitimate claims. 
 
 

 
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Implementation of Tax Year 2020 Employer Tax Credits  
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Implementation of Tax Year 2020 Employer Tax Credits  
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Attachment 
 
Outcome Measure #1: Cost Savings (Funds Put to Better Use) – Actual; *******2******** 
*********2********* from processing of ***************************2****************************** 
*************2************ (see page 7). 
 
Comments: 
We agree with the methodology for this outcome measure. 
 
Responsible Official: 
Director, Return Integrity Verification Program Management (RIVPM). 
 
Outcome Measure #2: Cost Savings (Funds Put to Better Use) – Potential; $1,506,831 
in potentially erroneous employer tax credits processed on potentially erroneous Forms 
941 (see page 8). 
 
Comments: 
We agree with the methodology for this outcome measure. 
 
Responsible Official: 
Director, Return Integrity Verification Program Management (RIVPM). 
 
Outcome Measure #3: 
Cost Savings (Funds Put to Better Use) – Potential; $9,161,609 potentially erroneous 
employer tax credits processed for government entities on the Form 941 (see page 9). 
 
Comments: 
We disagree. This outcome measure incorrectly assumes that 100% of the entities cited 
are ineligible to claim employer credits. 
 
In addition to the issues discussed above, the systemic programming to reject credits 
claimed by these taxpayers without a manual review may reject a valid, otherwise 
qualifying, entity entitled to the credits. Systemically rejecting returns may unintentionally 
harm taxpayers by erroneously requiring them to contact the IRS rectify the issue, 
delaying a refund or credit to which they are entitled and increasing burden. Instead, the 
IRS has a process to identify taxpayers who have claimed a credit and appear to be 
ineligible entities and proposes disallowance of the credit in question. Our post-
processing approach more appropriately balances compliance with the need to assist 
taxpayers during a pandemic. 
 
Finally, the Outcome Measure does not accurately reflect the potential impact of the 
TIGTA audit since it also includes returns identified by the IRS. 

 
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Implementation of Tax Year 2020 Employer Tax Credits  
Enacted in Response to the COVID-19 Pandemic 
Appendix V 
Abbreviations 
CARES 
Coronavirus, Aid, Relief, and Economic Security Act 
COVID-19 
Coronavirus Disease 2019 
EIN 
Employer Identification Number 
FFCRA 
Families First Coronavirus Response Act 
IRS 
Internal Revenue Service 
TIGTA 
Treasury Inspector General for Tax Administration  
 

 
 
 
 
 
 
 
To report fraud, waste, or abuse,  
call our toll-free hotline at: 
(800) 366-4484 
By Web: 
www.treasury.gov/tigta/ 
Or Write: 
Treasury Inspector General for Tax Administration 
P.O. Box 589 
Ben Franklin Station 
Washington, D.C. 20044-0589 
 
 
Information you provide is confidential, and you may remain anonymous.

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