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United States Government Accountability Office
Report to Congressional Committees
COVID-19 RELIEF
February 2026
IRS Can Use Lessons
Learned to Address
and Prevent Improper
Payments in Future
Tax Programs
GAO-26-107456
COVID-19 RELIEF
Highlights IRS Can Use Lessons Learned to Address and Prevent
Improper Payments in Future Tax Programs
GAO-26-107456 February 2026
A report to Congressional Committees
For more information, contact: Jessica Lucas-Judy at lucasjudyj@gao.gov.
What GAO Found Why GAO Did This Study
As of June 2025, the Internal Revenue Service (IRS) processed nearly 5 million The ERC—which encouraged
Employee Retention Credit (ERC) claims. IRS moved quickly to administer ERC employers to keep paying employees
but was less prepared to assess improper payment risks and process a surge in during the COVID-19 pandemic—had
claims. To address improper claims, IRS implemented a processing moratorium provided about $283 billion to
in September 2023. IRS closed most claims by December 31, 2025, according to employers as of June 2025. GAO
IRS officials. GAO identified six lessons from ERC design and administration. previously found that implementing new
initiatives—such as the ERC—is a
Lessons Learned from the Design and Administration of Employee Retention Credit challenge for IRS. A law passed in July
Offering Relief Through Employment Taxes Provides Benefits and Challenges 2025 affected ERC by, in part,
• Benefits include availability to employers without tax liability. Challenges include interactions with income disallowing certain unpaid claims made
tax. after January 31, 2024.
Some Design Decisions Increased Complexity and Improper Payment Risk
In response to a request, this report
• Complex and retroactive eligibility criteria complicated eligibility determination.
presents lessons learned on the ERC’s
The Internal Revenue Service (IRS) Would Have Benefitted from a Comprehensive Plan for Managing
Employee Retention Credit (ERC) Risks design and administration, examines
• Timely implementing a 2022 GAO recommendation on project planning could have better prepared IRS for
actions IRS can take to be better
a later surge in claims. prepared for emergency employment
IRS Would Have Benefitted from Additional Eligibility Reporting tax relief, and describes economic
• Key eligibility information was not required on employment tax returns. conditions—such as unemployment
Manual Processing for Amended Returns Complicated Compliance Efforts
levels—surrounding ERC.
• Paper-only amended returns limited IRS’s ability to capture key data. To identify lessons learned, GAO
ERC Implementation Could Have Benefitted from More Timely and Consistent Communication with reviewed literature and interviewed
Stakeholders. experts and agency officials about the
• IRS did not regularly communicate status of ERC processing. ERC’s design and implementation.
Source: GAO. | GAO-26-107456 GAO observed ERC processing at an
IRS campus. GAO compared
These lessons could help policymakers consider future emergency employment documents with selected practices for
tax relief, and help IRS better prepare for it. IRS did not complete an improper managing payments in emergency
payment estimate for ERC, as required in law. The Department of the Treasury programs (GAO-23-105876). GAO also
said it would not do so for pandemic programs as they are short term. However, analyzed IRS data on ERC processing
a timely estimate could have helped identify root causes of improper payments and compared it with economic data.
earlier and developing one now could guide future decisions on employment tax
relief. The statute of limitations for assessing tax on certain paid improper ERCs What GAO Recommends
has expired. However, IRS can still pursue fraud cases indefinitely.
GAO is making four recommendations
Employers primarily claimed ERC on paper amended returns. IRS enabled to IRS, including that it develop and
electronic filing in mid-2024 but continued to process the returns manually. report an improper payment estimate
Automated processing would yield cost savings and expedite refunds. IRS’s last for ERC, automate amended
public update on ERC processing status was in October 2024, leaving employment tax return processing,
uncertainties about cash flow among some employers. IRS also did not follow all provide an update to the public on ERC
risk management and internal control principles from GAO’s A Framework for processing, and include key principles
Managing Improper Payments in Emergency Assistance Programs. IRS could on managing improper payments in
reduce future improper payments by incorporating this framework into its policies. emergency assistance programs in its
policies. IRS agreed with one
As a consequence of its design and administrative challenges, most ERC claims recommendation, partially agreed with
were not paid in 2020 or 2021, the eligibility period for the credit. About 83 another, and disagreed with two. GAO
percent of ERC refunds—about $235 billion—were issued in 2022 through June maintains that all four recommendations
2025, well after unemployment had returned to its pre-pandemic level. are warranted, as explained in the
report.
United States Government Accountability Office
Contents
Letter 1
Background 4
Decisions on the Design and IRS’s Administration of ERC Can
Provide Lessons for Future Economic Relief 6
IRS Could Take Steps to Be Better Prepared to Address Improper
Payments in Future Emergencies 47
ERC Refunds Peaked After Economic Conditions Had Changed
Substantially from 2020 49
Conclusions 53
Recommendations for Executive Action 54
Agency Comments 55
Appendix I Objectives, Scope and Methodology 60
Appendix II Questions for Policymakers to Consider for Future Emergency
Economic Relief 64
Appendix III Internal Revenue Service Actions to Identify Employee Retention Credit
Claims Improperly Using Wages from Forgiven Paycheck Protection
Program Loans 65
Appendix IV Internal Revenue Service Efforts to Address Ineligible Employee
Retention Credit Claims on Amended Returns 69
Appendix V Comments from the Internal Revenue Service 73
Appendix VI GAO Contacts and Acknowledgments 78
Page i GAO-26-107456 COVID-19 Relief
Tables
Table 1: Common Third-Party Arrangements, Responsibilities,
and Liabilities Prior to Employee Retention Credit 13
Table 2: Design Lessons and Questions for Policymakers to
Consider for Future Emergency Economic Relief 64
Figures
Figure 1: Lessons Learned and Contributing Factors from
Documents and Interviews on the Design and
Administration of the Employee Retention Credit 7
Figure 2: Internal Revenue Service Schedule R (Form 941) for
Third-Party Payers Filing Employee Retention Credits on
Behalf of Clients 14
Figure 3: Employee Retention Credit Legislative Changes Related
to Eligibility 21
Figure 4: Timeline of Internal Revenue Service’s Employee
Retention Credit Risk Identification Actions 32
Figure 5: Excerpt from Employee Retention Credit Examination
Questionnaire, 2023 37
Figure 6: Employee Retention Credit Processed Claims and
Unemployment Rates, 2020—2025 50
Figure 7: Employee Retention Credit Refunds and Unemployment
Rates, 2020—2025 51
Figure 8: Employee Retention Credit Refunds and Inflation,
2020—2025 52
Figure 9: Employee Retention Credit Refunds and Paycheck
Protection Program Loan Approvals, 2020—2025 53
Figure 10: Employee Retention Credit Amended Return
Processing for Claims Received After September 14,
2023 70
Page ii GAO-26-107456 COVID-19 Relief
Abbreviations
ARPA American Rescue Plan Act
BLS Bureau of Labor Statistics
CAA, 2021 Consolidated Appropriations Act, 2021
CI Criminal Investigations
CPEO Certified Professional Employer Organization
EIN Employer Identification Number
ERC Employee Retention Credit
FAQ Frequently Asked Questions
IIJA Infrastructure Investment and Jobs Act
IRS Internal Revenue Service
MOU Memorandum of Understanding
OMB Office of Management and Budget
PEO Professional Employer Organization
PIIA Payment Integrity Information Act
PMBOK® Guide A Guide to the Project Management Body of
Knowledge
PPP Paycheck Protection Program
SBA Small Business Administration
TIGTA Treasury Inspector General for Tax Administration
VDP Voluntary Disclosure Program
This is a work of the U.S. government and is not subject to copyright protection in the
United States. The published product may be reproduced and distributed in its entirety
without further permission from GAO. However, because this work may contain
copyrighted images or other material, permission from the copyright holder may be
necessary if you wish to reproduce this material separately.
Page iii GAO-26-107456 COVID-19 Relief
Letter
441 G St. N.W.
Washington, DC 20548
February 10, 2026
Congressional Committees
The Employee Retention Credit (ERC) resulted in about $283 billion in
reduced tax liability or credits to employers since enacted in the CARES
Act in March 2020. 1 ERC encouraged employers to keep employees on
their payrolls during the COVID-19 pandemic. This refundable tax credit
was available to eligible employers whose trade or business was
suspended by a government order due to COVID-19 or who were
financially affected, according to the statute, during calendar quarters in
2020 and 2021. 2 Implementation of new initiatives—such as the ERC—
has been a challenge for the Internal Revenue Service (IRS) as we have
previously reported, including in our 2025 High-Risk Report. 3
Early in the pandemic, federal agencies prioritized swiftly distributing
funds and implementing new programs to help businesses and individuals
adversely affected by COVID-19. We previously reported that while this
swift response helped meet urgent needs, it involved trade-offs that put
billions of dollars at increased risk for improper payments, including
overpayments. 4 A surge of promoters convincing employers to file
questionable ERC claims led IRS to implement a processing moratorium
1CARES Act, Pub. L. No. 116-136, § 2301, 134 Stat. 281 347–351. Dollars are based on
Internal Revenue Service (IRS) data, as of June 25, 2025. This dollar amount does
include later reductions to ERC amounts, according to IRS officials. According to the
Taxpayer Advocate Service, IRS had either disallowed, reversed, or recaptured
approximately 214,000 of these claims—a small fraction of all taxpayer claims—as of April
29, 2025.
2A refundable tax credit means that a credit in excess of tax liability results in a cash
refund.
3GAO, High-Risk Series: Heightened Attention Could Save Billions More and Improve
Government Efficiency and Effectiveness, GAO-25-107743 (Washington, D.C.: Feb. 25,
2025).
4GAO, COVID-19 Relief: SBA and DOL Should Improve Processes to Identify and
Recover Overpayments, GAO-25-106199 (Washington, D.C.: Nov. 13, 2024).
Page 1 GAO-26-107456 COVID-19 Relief
in September 2023. 5 Deficiencies in addressing risks and planning for
enforcing ERC compliance, as identified in our prior work, and the
subsequent volume and timing of questionable claims suggests there are
lessons for future emergency relief. 6 In July 2025, a new law was enacted
to retroactively deny some ERC claims and levy penalties on some ERC
promoters. 7
You asked us to report on ERC filing and compliance and to identify
lessons learned. 8 This report (1) presents lessons learned related to the
design and administration of ERC; (2) examines how IRS can be better
prepared to address improper payments while managing emergency
assistance through the employment tax system; and (3) describes the
economic conditions surrounding ERC during and after the height of the
pandemic.
To identify lessons learned and actions that IRS can take, we conducted
a literature review and we reviewed legislative proposals for fiscal years
2022 to 2025, and IRS’s documentation of its research, policy and
procedures, and leadership briefings from 2020 to 2025. We also
interviewed (1) IRS staff and managers from offices involved in ERC
implementation, including current and former executives leading ERC
implementation, (2) experts with experience in ERC and tax policy that we
selected through our literature review and outreach to public policy
groups, and (3) two groups representing payroll professionals and an
accounting industry group. We visited IRS’s Covington, Kentucky campus
5The term “promoter” generally means a person who (1) organizes an entity, investment
plan or arrangement, or any other plan or arrangement, or participates, directly or
indirectly, in the sale of any interest in an entity, plan, or arrangement; and (2) makes,
furnishes, or causes another person to make or furnish a statement about its tax benefits.
See 26 U.S.C. § 6700(a). In December 2022, we reported on IRS efforts to detect and
deter promoters of abusive tax schemes. GAO, Abusive Tax Schemes: Additional Steps
Could Further IRS Efforts to Detect and Deter Promoters, GAO-23-105843 (Washington,
D.C.: Dec. 15, 2022).
6GAO, COVID-19: IRS Implemented Tax Relief for Employers Quickly, but Could
Strengthen Its Compliance Efforts, GAO-22-104280 (Washington, D.C.: May 17, 2022).
7An Act to provide for reconciliation pursuant to title II of H. Con. Res. 14, Pub. L. No. 119-
21, 139 Stat. 72, 288 (2025).
8The CARES Act included a provision for us to monitor and oversee the federal
government’s efforts to prepare for, respond to, and recover from the COVID-19
pandemic. Pub. L. No. 116-136, § 19010, 134 Stat. 281, 579–81. The American Rescue
Plan Act of 2021 also includes a provision for GAO to conduct oversight of the COVID-19
response. Pub. L. No. 117-2, § 4002, 135 Stat. 4, 78. This report contributes to our body
of work on the pandemic, available on GAO’s website at https://www.gao.gov/coronavirus.
Page 2 GAO-26-107456 COVID-19 Relief
where ERC claims are processed to interview IRS ERC leadership and
observe ERC processing. Statements from these interviews are used as
examples and are not generalizable to all IRS staff, and payroll and tax
professionals.
To identify actions that IRS can take to address improper payments, we
compared the evidence sources listed above with criteria from A
Framework for Managing Improper Payments in Emergency Assistance
Programs. 9 The framework provides five principles and corresponding
practices that can help federal program managers mitigate improper
payments, particularly in emergency assistance programs. 10 The
framework is also intended as a resource for Congress to use when
designing new programs in response to emergencies.
To describe the economic conditions surrounding ERC, we analyzed ERC
processing data from IRS and compared these data with unemployment,
and inflation data from the Bureau of Labor Statistics, for third calendar
quarter 2020 through second calendar quarter 2025. 11 We also compared
ERC refund dates with Paycheck Protection Program (PPP) loan
approval data, for 2020 and 2021, from the Small Business
Administration. See appendix I for more information on our scope and
methodology. We found these data to be sufficiently reliable for
describing general ERC processing trends and economic conditions at
the time ERC claims were processed.
We conducted this performance audit from February 2024 to February
2026 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 objectives. We believe
9GAO, A Framework for Managing Improper Payments in Emergency Assistance
Programs, GAO-23-105876 (Washington, D.C.: July 13, 2023).
10An improper payment is defined by law as any payment that should not have been made
or that was made in an incorrect amount (including overpayments and underpayments)
under statutory, contractual, administrative, or other legally applicable requirements. It
includes any payment to an ineligible recipient, any payment for an ineligible good or
service, any duplicate payment, any payment for a good or service not received (except
for such payments where authorized by law), and any payment that does not account for
credit for applicable discounts. 31 U.S.C. § 3351(4).
11IRS data as of June 25, 2025.
Page 3 GAO-26-107456 COVID-19 Relief
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
Background
Employment Tax Filing For federal tax purposes, employers generally are required to withhold
and remit taxes from their employees’ wages, including federal income
tax and Federal Insurance Contribution Act taxes (Social Security and
Medicare taxes). Together, they are referred to as “employment taxes.” 12
Employers must deposit employment taxes daily, semi-weekly or monthly,
depending on their reported tax liabilities. Employers that accumulate
$100,000 or more in taxes in a day must deposit tax by the next business
day. 13
Most employers file employment taxes quarterly, and could claim the
ERC on Form 941, Employer’s Quarterly Federal Tax Return. Employers
meeting certain industry or size criteria may file annually on other forms. 14
To receive tax relief such as the ERC more quickly, employers could
reduce their employment tax deposits by the anticipated ERC amount
during the quarter. Certain employers filing for ERC also had the option to
request an advance payment—before the end of a quarter—if the total for
their COVID-19 related tax credits exceeded their reduced employment
tax deposits. 15 If an employer did not claim the ERC on an original
employment tax return (for example, the Form 941), employers could
claim the ERC on an amended employment tax return. For Form 941
filers, that amended employment tax return is Form 941-X, Adjusted
Employer’s Quarterly Federal Tax Return or Claim for Refund.
1226 U.S.C. §§ 3402, 3101, 3102, 3111. Employers must also generally pay the federal
unemployment insurance payroll tax. 26 U.S.C. § 3301. However, this is not withheld from
employee wages and is reported separately from Federal Insurance Contributions Act
taxes.
13Certain employers—who meet tax liability and other requirements—may deposit their
employment taxes with their timely filed return.
14For example, agricultural employers file Form 943, Employer’s Annual Federal Tax
Return for Agricultural Employees, and small employers file Form 944, Employer’s Annual
Federal Tax Return.
15The COVID-19 related tax credits include: ERC; paid sick and family leave credits; and
the COBRA Premium Assistance Credit.
Page 4 GAO-26-107456 COVID-19 Relief
ERC Eligibility Under the CARES Act as amended, eligible employers of any size—
including tax-exempt entities, eligible governmental entities, and self-
employed individuals with employees—could claim the ERC. 16 The credit
amount was based on qualified wages paid to employees after March 12,
2020, including certain health care expenses. 17 Under the CARES Act, as
originally enacted, an employer was considered eligible for ERC when it
experienced either (1) a full or partial suspension of operations due to
governmental orders during any quarter, or (2) a requisite decline in gross
receipts of more than 50 percent from the same quarter in 2019. 18 Under
the CARES Act, as originally enacted, employers were prohibited from
participating in both ERC and the PPP. 19
Subsequent laws amended or modified key aspects of ERC, which
affected implementation. The Consolidated Appropriations Act, 2021
(CAA, 2021), amended aspects of the ERC for credits in 2021, including
increased credit maximums, a lower gross receipts threshold, and
extending eligibility to employers who had a forgiven PPP loan. 20 The
CAA, 2021 also contained retroactive amendments, most notably, the
eligibility change for PPP borrowers. Given these modifications,
employers could file amended employment tax returns to claim ERCs for
qualified wages paid in 2020.
The American Rescue Plan Act of 2021 granted eligibility to “recovery
startup businesses” who otherwise would not meet eligibility criteria to
16Pub. L. No. 116-136, § 2301, 134 Stat. 281, 347–351; Consolidated Appropriations Act,
2021, Pub. L. No. 116-260, §§ 206, 207, 134 Stat.1182, 3059–3065; American Rescue
Plan Act of 2021 (ARPA), Pub. L. No. 117-2, § 9651, 135 Stat. 4, 176–182. Infrastructure
Investment and Jobs Act (IIJA); Pub. L. No. 117-58, § 80604, 135 Stat. 429, 1341 (2021).
17For eligible large employers (that averaged more than 100 employees during 2019),
qualified wages were those paid to an employee not providing services during periods of
full or partial suspension of operation due to a governmental order or the requisite
decrease in gross receipts. For eligible small employers (that averaged 100 or fewer
employees during 2019), qualified wages were wages paid to an employee during the
same periods.
18Employers were no longer eligible in the first quarter after the one in which gross
receipts were more than 80 percent of the same quarter in the previous calendar year.
19Pub. L. No. 116-136, § 2301(j), 134 Stat. 281, 350 (2020).
20Pub. L. No. 116-260, §§ 206, 207, 134 Stat. 1182, 3059–3064. PPP loans were made
by lenders to qualifying small businesses and nonprofit organizations, guaranteed 100
percent by the Small Business Administration, low interest, and fully forgivable if certain
conditions are met. To qualify for full loan forgiveness, a business had to use at least 60
percent of the loan amount for payroll costs, among other requirements.
Page 5 GAO-26-107456 COVID-19 Relief
claim the credit, among other changes. 21 The Infrastructure Investment
and Jobs Act retroactively terminated the ERC for wages paid after
September 30, 2021, for employers other than recovery startup
businesses. 22 In July 2025, Congress passed Public Law 119-21—
commonly known as the One Big Beautiful Bill Act—which retroactively
denied certain pending ERC claims. 23 Under the One Big Beautiful Bill
Act, pending claims for the third and fourth quarters of 2021 that were
filed after January 31, 2024 will be denied. The legislation also extended
the statute of limitations on certain IRS assessments, and imposed
penalties on ERC promoters for failing to comply with IRS due diligence
requirements to confirm ERC eligibility. 24
Based on our review of IRS documents, literature and legislative
Decisions on the proposals, and interviews with experts, IRS management and staff, and
Design and IRS’s payroll and tax professional groups, we identified six lessons for future
economic relief efforts related to the design and IRS’s administration of
Administration of the ERC (see appendix I for more information on our methodology). See
ERC Can Provide figure 1. This section describes the contributing factors and, where
applicable, provides questions policymakers can consider when designing
Lessons for Future future economic relief. A complete list of questions for policymakers is in
Economic Relief appendix II.
21Pub. L. No. 117-2, § 9651, 135 Stat. 4, 179. Recovery startup businesses are employers
that: (1) began carrying on a trade or business after February 15, 2020; and (2) had
average annual gross receipts under $1 million for the 3 taxable years ending with the
taxable year that precedes the calendar quarter for which the ERC is determined.
22Pub. L. No. 117-58, § 80604, 135 Stat. 429, 1341 (2021).
23Pub. L. No. 119-21, § 70605(d), 139 Stat. 72, 287-288 (2025). The Joint Committee on
Taxation estimated that the bill’s ERC provisions would save $1.6 billion from fiscal years
2025 through 2028. See Estimated Revenue Effects Relative to the Present Law Baseline
of the Tax Provisions in “Title VII – Finance” of the Substitute Legislation As Passed by
the Senate To Provide for Reconciliation of the Fiscal Year 2025 Budget, JCX-35-25 (July
1, 2025).
24Pub. L. No. 119-21, § 70605(b), 139 Stat. 72, 287 (2025). For purposes of penalties, the
law defined a COVID-ERC promoter as anyone who facilitates the filing of ERC claims
and whose ERC fees constitute a certain percentage of their advisory business’s receipts
but does not include certified professional employer organizations as defined under 26
U.S.C. § 7705.
Page 6 GAO-26-107456 COVID-19 Relief
Figure 1: Lessons Learned and Contributing Factors from Documents and
Interviews on the Design and Administration of the Employee Retention Credit
Page 7 GAO-26-107456 COVID-19 Relief
Lessons Learned on Employee Retention
Credit Design
We identified two lessons, each with
contributing factors. We also pose questions
that policymakers can consider for future tax
relief.
Source: GAO. | GAO-26-107456
Offering Relief Through Contributing Factors on Employment Tax System
Employment Taxes • Employment tax credits can offer fast relief to all employers
Provides Potential • Credits through the employment tax system are unusual and labor
Benefits and Unique intensive for the Internal Revenue Service (IRS) to administer
Challenges • Until July 2025, IRS did not have statutory authority to assess
erroneous filing penalties for employment tax credits
• Aggregate filers complicate claims
• Employment tax credits can complicate income tax liability
Source: GAO analysis. | GAO-26-107456
Employment Tax Credits Can The employment tax system has two advantages over using the income
Offer Fast Relief to All tax system to distribute economic relief: it (1) can disburse refunds faster,
Employers throughout the year; and (2) is available to all employers.
Faster. The frequency of employment tax deposits—which employers
could make daily, semi-weekly or monthly—provided an opportunity for
employers to benefit from ERC quickly during the pandemic. 25 The ERC
also included both a refundable and nonrefundable portion. 26 The ERC
refundable portion was any ERC amount remaining at the end of the
quarter if the ERC amount exceeded the employer share of Social
Security tax or Medicare tax. If an employer anticipated that during a
quarter the ERC amount would exceed the employer’s employment taxes,
the employer could reduce deposits during the quarter by the amount of
the anticipated ERC. The nonrefundable portion of the credit is limited to
25Employers use Form 941, Employer’s Quarterly Federal Tax Return, to report income
taxes, Social Security tax, or Medicare tax withheld from employee’s paychecks; and to
pay the employer’s portion of Social Security or Medicare tax.
26Refundable tax credits differ from other credits because a taxpayer is able to receive a
refund check from IRS for the amount their credit exceeds their tax liability. A
nonrefundable credit can be used to offset tax liability, but any excess of the credit over
the tax liability is not refunded to the taxpayer.
Page 8 GAO-26-107456 COVID-19 Relief
the employer’s share of Social Security tax or Medicare tax, depending on
the quarter. 27
Available. The employment tax system also provides tax benefits to
entities that do not have an income tax liability. Entities such as non-profit
organizations that are exempt from income tax (referred to as “exempt
organizations”) accounted for about 10 percent of employment in 2022. In
2022, we reported that about 9 percent of ERC claims were filed by
exempt organizations. 28 Additionally, because start-up businesses may
not yet have enough income to generate tax liability, employment tax
credits offer relief to these entities whereas income tax credits cannot,
according to one legal expert.
Question for policymakers to consider for future emergency economic relief
Will use of the employment tax or employment tax system provide timely relief to the intended population?
Source: GAO. | GAO-26-107456
Credits Through the Unusual. Prior to the pandemic, relatively few tax credits were claimed
Employment Tax System Are through the employment tax system compared to the income tax
Unusual and Labor Intensive system. 29 Historically, compliance issues for employment taxes typically
for IRS to Administer related to the reporting of taxable wages, such as employee and
contractor classifications. As a result, IRS officials told us that when ERC
was created, the agency did not have many IT systems and processes in
place to administer and ensure compliance with employment tax credits.
Labor intensive. During fiscal year 2024, IRS received about 34 million
original employment tax returns and about 12 million of these (35 percent)
were filed on paper. Furthermore, prior to mid-2024, amended
employment tax returns (Form 941-X) could only be filed on paper.
The large volumes of paper returns made delivering economic relief
through employment taxes cumbersome for IRS to administer. During
27This share was also reduced for any amounts claimed for the Qualified Small Business
Payroll Tax Credit for Increasing Research Activities, the Work Opportunity Credit for
Qualified Tax-Exempt Organizations Hiring Qualified Veterans, and the Sick and Family
Leave Credits.
28GAO-22-104280.
29From 2010 to March 2020, IRS only administered three credits on the Form 941 and one
credit on the Form 941-X, which taxpayers use to amend a previously filed Form 941. In
2020, there were 38 business tax credits listed in the Form 3800 instructions.
Page 9 GAO-26-107456 COVID-19 Relief
processing, paper-filed returns need to be handled by multiple IRS
employees. Employees also need to manually key in data from paper
forms into IRS IT systems. By contrast, e-filed returns are processed
using automation and only require human intervention if the return has an
issue. 30
While quarterly employment tax filings provided IRS more opportunities to
issue refunds to employers, the resulting increases in paper filings added
to processing burdens for IRS. These processing challenges for paper
returns were exacerbated during the pandemic when IRS had to suspend
work at its submission processing centers. As we reported in 2021, the
large volumes of paper filings created significant backlogs, delaying relief
payments to struggling businesses. 31 In 2021, we recommended that IRS
identify and address barriers that taxpayers face to e-filing business
returns. In response to our recommendation and other factors, IRS has
been taking some steps to improve electronic filing rates for businesses. 32
Question for policymakers to consider for future emergency economic relief
Does the Internal Revenue Service have the capacity to use the employment tax system to implement relief
efficiently?
Source: GAO. | GAO-26-107456
30We previously reported that IRS’s reliance on manual processing of paper returns has
led to significant backlogs, increased costs, and delays for taxpayers, particularly during
the pandemic. GAO, 2024 Tax Filing: IRS Improved Live Service and Began to Modernize
Some Operations, but Timeliness Issues Persist, GAO-25-107375 (Washington, D.C.:
Jan. 30, 2025).
31GAO, Tax Filing: Actions Needed to Address Processing Delays and Risks to the 2021
Filing Season, GAO-21-251 (Washington, D.C.: Mar. 1, 2021).
32In January 2025, we reported that IRS had conducted an assessment to identify barriers
business taxpayers face when e-filing and taken some steps to determine actions to
address those barriers. Addressing barriers to e-filing business returns, as we
recommended in March 2021, could help IRS reduce the volume of more costly paper-
based work and improve services. See GAO-25-107375.
Page 10 GAO-26-107456 COVID-19 Relief
Until July 2025, IRS Did Not Since 2007, federal law has provided IRS specific authority to impose a
Have Statutory Authority to civil penalty on erroneous claims for income tax refunds or credits. 33 The
Assess Erroneous Filing penalty is equal to 20 percent of the excessive amount claimed. 34
Penalties for Employment Tax However, federal law did not provide for this penalty authority for other
Credits types of taxes, including employment taxes. In March 2024, the
Department of the Treasury proposed that federal law extend the income
tax penalty on erroneous claims to employment tax refunds or credits. 35 In
July 2025, legislation was enacted to extend the penalty to employment
taxes. 36
In its March 2024 proposal, Treasury said that extending the penalties to
employment taxes would discourage certain fraudulent claims. According
to IRS officials, prior to the legislative change, if an employer filed
erroneous ERC claims that IRS detected before issuing a refund, the only
likely consequence to the employer would be the claim’s denial. 37
Promoters of ERC tax schemes might have known that the penalty for
claiming erroneous income tax refunds or credits did not apply to
employment tax, according to an IRS official. These promoters may have
pushed employers to file erroneous ERC claims by convincing the
employers that they had nothing to lose, according to IRS.
33Small Business and Work Opportunity Act of 2007, Pub. L. No. 110-28, § 8247, 121
Stat. 112, 204.
3426 U.S.C. § 6676(a) states: “If a claim for refund or credit with respect to income or
employment tax is made for an excessive amount, unless it is shown that the claim for
such excessive amount is due to reasonable cause, the person making such claim shall
be liable for a penalty in an amount equal to 20 percent of the excessive amount.”
35Department of the Treasury, General Explanations of the Administration’s Fiscal Year
2025 Revenue Proposals (Washington D.C.: Mar. 11, 2024).
36Pub. L. No. 119-21, § 70605, 139 Stat. 72, 288 (2025).
37IRS guidance on the ERC Voluntary Disclosure Program stated that an employer who
claims and receives an ERC to which they are not entitled, could face interest, penalties,
and potential criminal investigation and prosecution. For example, see Internal Revenue
Service, “Frequently Asked Questions about the second Employee Retention Credit
Voluntary Disclosure Program,” https://www.irs.gov/newsroom/frequently-asked-
questions-about-the-second-employee-retention-credit-voluntary-disclosure-program (last
updated May 29, 2025). See for example 26 U.S.C § 6663 and 26 U.S.C. § 6651(f).
Page 11 GAO-26-107456 COVID-19 Relief
Question for policymakers to consider for future emergency economic relief
Does federal law provide the Internal Revenue Service sufficient statutory authority to assess penalties on
erroneous claims for emergency economic relief to help ensure compliance?
Source: GAO. | GAO-26-107456
Aggregate Filers Complicate Third-party aggregate filers, which assist employers with various payroll
Claims and tax requirements, are subject to a series of IRS requirements that
can complicate compliance decisions and delay ERC processing. To
claim ERC for their clients, these filers are required to file a single
aggregate employment tax return under their own employer identification
number (EIN), representing themselves and their clients. 38 Aggregated
information made it difficult for IRS to determine whether some ERC
claims represented multiple employers. By contrast, some third parties
may file employment taxes for clients, but they file separate returns for
each client under the client’s employer’s EIN, therefore eliminating the
extra step of IRS having to link an employer with an ERC claim on an
aggregate return. See table 1 for the variations of third-party
arrangements.
38Pub. L. No. 116-136, § 2301(l), 134 Stat. 281, 350-351 (2020); Pub. L. No. 116-260, §
207, 134 Stat. 1182, 3064–3065 (2020); Pub. L. No. 119-21, 139 Stat. 72, 287 (2025); 26
U.S.C. §§ 3504, 3511, and 7705; IRS Notice 2021-20, 2021-11 I.R.B. 922 (Mar. 15, 2021).
Note that under the One Big Beautiful Bill Act, the COVID-ERC promoter definition does
not include a certified professional employer organization as defined in 26 U.S.C. § 7705.
Page 12 GAO-26-107456 COVID-19 Relief
Table 1: Common Third-Party Arrangements, Responsibilities, and Liabilities Prior to Employee Retention Credit
Third-party payer arrangement Employment tax filings Employment tax Employment tax liability
payments
Third parties that file separate returns for employer clients
Payroll service provider: typically prepares Employer signs the return and Paid under the Employer is solely liable
employment tax returns, and processes files under its Employer employer EIN. for timely filing and tax
withholding, deposit, and payment of employment identification Number (EIN). payment.
tax.
Reporting agent: a type of payroll service provider Reporting agent signs the Paid under the Employer is solely liable
that is designated as a reporting agent. The agent return, filed under the employer EIN. for timely filing and tax
files returns and may deposit and pay taxes on employer EIN. payment.
employer’s behalf.a
Third parties that file an aggregate return
Section 3504 agent: performs acts such as Aggregate return filed under Aggregate tax paid Both employer and agent
withholding, reporting and paying employment the agent’s own EIN for all under the agent’s are liable for timely filing
taxes.b clients. EIN. and tax payment.
Professional employer organization (PEO): also Aggregate return filed under Aggregate tax paid Circumstance dependent.
known as an employee leasing organization, a the PEO’s EIN for all clients. under the PEO’s
PEO does some or all withholding, reporting and EIN.
paying employment tax.
Certified professional employer organization Aggregate return filed under Aggregate tax paid Generally, the CPEO is
(CPEO): a PEO that has completed a certification the CPEO’s EIN for all clients. under the CPEO’s solely liable for filing and
process through the Internal Revenue Service EIN. tax.
(IRS).
Source: GAO analysis of IRS information. | GAO-26-107456
Notes: The table reflects common third-party arrangements, responsibilities, and liabilities prior to
Employee Retention Credit (ERC). An IRS Chief Counsel memorandum states that a third-party
payer that is a section 3504 agent, certain PEOs, or a CPEO is liable for any underpayment resulting
from an improperly claimed employment tax credit that the third-party payer claimed for the client on
the third-party payer’s employment tax return filed under the third-party’s EIN, where the credit was
claimed based on wages paid by the third-party payer to the client’s employees. This rule applies to
the ERC as it would any other employment tax credit. See IRS, Office of Chief Counsel
Memorandum, Liability of Certain Third-Party Payers for an Underpayment of Certain Employment
Taxes Resulting from Improperly Claimed Employment Tax Credits (Feb. 05, 2024).
aAn employer and a third-party file Form 8655, Reporting Agent Authorization, with IRS to designate
a payroll service provider as a Reporting Agent.
bAn employer and a third-party file Form 2678, Employer/Payer Appointment of Agent, with IRS to
authorize the third party as a Section 3504 Agent of the employer.
Beginning in 2020, all third-party filers filing for ERC were required to file
Schedule R for any client claiming an ERC employment tax credit.
Schedule R is completed with Form 941, and totals from lines on Form
941 are allocated among clients (see fig. 2). Total amounts reported on
Form 941 should match the client totals on Schedule R, per line.
Page 13 GAO-26-107456 COVID-19 Relief
Figure 2: Internal Revenue Service Schedule R (Form 941) for Third-Party Payers Filing Employee Retention Credits on Behalf
of Clients
Number of employers represented in an aggregate return is
sometimes unclear. IRS does not have data on the population of third-
party aggregate filers, according to IRS officials. Therefore, IRS also does
not know the number of clients represented in aggregate filings,
according to a draft legislative proposal. Despite the requirement to file
Schedule R, which would provide IRS with visibility into this population
(as reflected under “Client’s EIN” in fig. 2). IRS officials said third-party
aggregate filers were not consistent in meeting this requirement. As a
result, IRS does not always know whether some ERC claims represented
multiple employers. Knowing whether a large claim represents one
employer or many employers filed through a third-party helps IRS review
the claim, according to IRS officials. For example, a claim of $100 million
filed for one employer presents different risks than a claim of the same
amount that is an aggregate filing for several employers.
All-or-nothing processing. A third-party payer’s aggregated Schedule R
could represent thousands of clients, according to IRS officials. A problem
with one client claim on an aggregate return could delay processing for all
the claims, according to a group representing certain third-party payers.
Page 14 GAO-26-107456 COVID-19 Relief
Each time a client requests a change to their ERC, the third-party payer
files another amendment, according to IRS officials and payroll
professionals. IRS announced a process in September 2024 for third-
party payers to consolidate their ERC filings and withdraw any ineligible
claims.
Limited accessible data. Client-level aggregated data from Schedule R
filings are not easily extractable for analysis, according to IRS officials,
because of the format and amount of information (as reflected in the
individual rows for each client in fig. 2). Reviewing compliance for client-
level ERC claims requires extra steps to extract the EINs and other client-
specific data, which could increase the risk of improper payments.
Citing $10 billion of Professional Employer Organizations’ (PEO) ERC
claims considered to be very high risk of being improperly claimed, IRS
developed a legislative proposal for Treasury’s consideration for inclusion
in its fiscal year 2026 General Explanations of the Administration’s
Revenue Proposals. 39 IRS proposed that PEOs be required to file
Schedule R, and file aggregated returns electronically. Under the
proposal, PEOs would also be required to report on filing agreements with
clients. The proposal also included a failure to file penalty for PEOs not
filing Schedule R. The proposal stated that employment taxes that are not
allocated appropriately or reconciled to a Form 941 may result in a
significant loss of revenue if refunds are allocated incorrectly. Treasury
officials told us that the department would not issue a fiscal year 2026
version of General Explanations of the Administration’s Revenue
Proposals.
Question for policymakers to consider for future emergency economic relief
Are there any filing requirements or arrangements that could complicate the Internal Revenue Service’s
implementation and compliance efforts?
Source: GAO. | GAO-26-107456
Employment Tax Credits Can Employers generally deduct wages paid to employees on their income tax
Complicate Income Tax returns. Under the CARES Act, employers are barred from deducting
Liability wages claimed for ERC, thereby preventing a double tax benefit.
39For fiscal years 2022 to 2025, Treasury published explanations of the tax revenue
proposals to accompany the president’s budget. Department of the Treasury, “Revenue
Proposals,” accessed December 3, 2025, https://home.treasury.gov/policy-issues/tax-
policy/revenue-proposals.
Page 15 GAO-26-107456 COVID-19 Relief
ERC claims filed on amended employment tax returns complicate the
relationship between employment tax and income tax, especially when
ERCs were delayed. According to IRS’s frequently asked questions
(FAQ), ERC claimants should amend their income tax returns to reduce
the amount of their original wage expenses, if that adjustment has not yet
been made. 40
When an amended income tax return is filed, employers are expected to
pay any additional income tax due at the time of filing. For ERC claims
facing processing delays, employers face uncertainties about how to
amend their income tax returns. Therefore, to maintain cash flow,
employers may hesitate to amend their income tax returns until they have
received their refunds, according to a tax professional group. If an
employer proactively amended its income tax return to reduce its wage
deduction by the amount anticipated for ERC but the credit was
disallowed, its income tax liability decreases.
In March 2024, Treasury introduced a legislative proposal to extend the
statute of limitations for assessment on erroneous ERC claims to 5
years. 41 This proposal included assessing additional income tax from an
ERC claimant that did not make a corresponding downward adjustment to
its wage deduction. Enacted in July 2025, the One Big Beautiful Bill Act
included a provision which extended the statute of limitations on tax
assessments of certain ERC claims to 6 years. 42 In March 2025 IRS also
issued FAQs stating that employers could adjust income tax liabilities for
40IRS, “Frequently Asked Questions About the Employee Retention Credit,” accessed
March 25, 2025, https://www.irs.gov/coronavirus/frequently-asked-questions-about-the-
employee-retention-credit.
41Department of the Treasury, General Explanations of the Administration’s Fiscal Year
2025 Revenue Proposals (Washington D.C.: Mar. 11, 2024).
42Pub. L. No. 119-21, § 70605, 139 Stat. 72, 288 (2025). The extended statute of
limitations for certain ERC claims expires 6 years after the later of: (1) the date on which
the original return which includes the calendar quarter with respect to which such credit is
determined is filed, (2) the date on which such return is treated as filed under section
6501(b)(2) of the Internal Revenue Code, or (3) the date on which the claim for credit or
refund with respect to such credit is made.
Page 16 GAO-26-107456 COVID-19 Relief
the year in which their ERCs were finalized. The FAQs also stated that
filing a “protective claim” is an option to address the issue. 43
Question for policymakers to consider for future emergency economic relief
Are there implications of employment tax relief on income taxes? Issues to consider could include:
• Whether corresponding benefits from income tax are allowed.
• Whether the statute of limitations is sufficient for accommodating amendments to income tax returns.
• Whether income tax liability can be incorporated into employment tax calculations.
Source: GAO. | GAO-26-107456
Some Design Decisions Contributing Factors on Complexity and Improper Payment Risk
Increased Complexity and • Unclear and complex eligibility criteria made verification difficult
Improper Payment Risk • Retroactive changes to eligibility increased amended return filings and
improper payment risk
• Benefit of advance payments uncertain
• Lack of explicit statutory data sharing provisions affected the Internal
Revenue Service’s ability to obtain Paycheck Protection Program data
and necessitated an agreement
Source: GAO analysis. | GAO-26-107456
Unclear and Complex Eligibility The language of the CARES Act regarding some ERC eligibility criteria
Criteria Made Verification was vague which made it difficult for employers and IRS to determine
Difficult eligibility, according to IRS officials and tax and payroll professionals.
Employers could claim the ERC if either (1) their business operations
were fully or partially suspended by a government order as a result of the
COVID-19 pandemic, or (2) their business experienced the requisite
decrease in gross receipts. See sidebar.
43A “protective claim” is a claim for credit or refund filed by the taxpayer to preserve the
right to pursue a refund based on the resolution of an issue contingent on future events
that may not be determinable until after the refund statute has expired. Taxpayers file
protective claims to ensure they meet the timeliness requirement.
Page 17 GAO-26-107456 COVID-19 Relief
CARES Act definition of suspended
Government suspension. The government suspension criteria for ERC
business operations due to a government eligibility were subjective and the statutory language did not clearly define
order what qualified as a government order, according to IRS counsel.
According to the CARES Act (Pub. L. No.
116-136), employers were eligible for the
Government orders that limited commerce, travel, or group meetings due
Employee Retention Credit if their to COVID-19 varied widely among states and even within states. Unlike
businesses or trades were: federal declarations of disaster areas, there was no central source of
“fully or partially suspended during the information that IRS could use to verify if employers’ operations were fully
calendar quarter due to orders from an
appropriate governmental authority limiting or partially suspended by a state or local government order. 44 See text
commerce, travel, or group meetings (for box.
commercial, social, religious, or other
purposes) due to the coronavirus disease
2019 (COVID-19).” Challenges with verifying COVID-19 government shutdown order Employee
Source: GAO review of the CARES Act. | GAO-26-107456
Retention Credit eligibility criteria
In some states, the governor’s office issued statewide shutdown or stay-at-home orders that
suspended business or trade. Other states gave city, county, and local governments more
autonomy to issue their own orders. In some states, governors overrode or preempted those local
orders. In other states, courts struck down some governors’ stay-at-home orders.
The applicable dates for government orders varied widely. Some governments started issuing
stay-at-home orders and closing businesses in the first quarter of 2020 (March), whereas others
began in the second quarter (April). Some governments then began loosening restrictions on
businesses in the second quarter. Some loosened restrictions only to later reimpose them as
COVID-19 cases increased.
Some governments ordered only non-essential businesses to close, others closed specific
industries or types of businesses, and still others imposed capacity limitations or social distancing
on businesses. Some governments issued mandatory stay-at-home orders whereas others made
their stay-at-home orders voluntary or included exemptions for some activities like religious
gatherings.
Source: GAO. | GAO-26-107456
According to IRS officials, the IRS research division conducted
exhaustive searches to obtain information on government shutdown
orders. Because there was no central source for information on
suspension orders, IRS used some assumptions to identify possible
eligibility issues. According to IRS documents, most shutdown orders had
been lifted across the continental U.S. by the third quarter of 2021; so, for
the third and fourth quarters of 2021 most businesses could only qualify
for ERC based on declines in gross receipts. In addition, the lack of
statutory definitions for words in the law such as “suspended” and
44Before IRS can authorize tax relief for disaster victims, the President must declare that a
major disaster or emergency exists. 42 U.S.C. § 5170. The Federal Emergency
Management Agency provides a search tool to find declared disaster areas at:
https://www.fema.gov/disaster.
Page 18 GAO-26-107456 COVID-19 Relief
CARES Act definition of requisite decline
government “order,” made it difficult to audit returns, according to IRS
in gross receipts officials.
According to the CARES Act (Pub. L. No.
116-136), employers were eligible for the Some of the distinctions between essential and non-essential businesses
Employee Retention Credit (ERC) in 2020 if
the employer experienced a decline in gross in government shutdown orders caused confusion for the members of
receipts as follows: one business group, according to a group representative. Further, one
• beginning with the first calendar quarter expert said that uncertainties of the eligibility criteria and the wide
beginning after December 31, 2019, for
which gross receipts for the calendar variations of government suspension orders led promoters to believe that
quarter are less than 50 percent of gross IRS would likely trust employer filings. In addition to opening the door for
receipts for the same calendar quarter in
the prior year; and
promoters, the uncertain eligibility criteria discouraged cautious
• ending with the calendar quarter following
employers who might legitimately qualify for the credit, according to IRS
the first calendar quarter beginning after a counsel.
calendar quarter described in clause for
which gross receipts of such employer are
greater than 80 percent of gross receipts for Decrease in gross receipts. Employers could also be eligible for ERC if
the same calendar quarter in the prior year. they experienced the requisite decrease in gross receipts. Employers
According to the CARES Act, as amended, generally report gross receipts annually on income tax returns. See
employers were eligible for the ERC in 2021 if
the employer experienced a decline in gross sidebar.
receipts as follows:
• the gross receipts of the employer for the The gross receipts definition was confusing for tax-exempt entities
calendar quarter are less than 80 percent of
the gross receipts of the employer for the
because most nonprofit organizations did not compute gross receipts
same calendar quarter in 2019; and quarterly, according to representatives from a group representing these
• the employer could also use the alternative entities. In June 2020, IRS issued a Frequently Asked Question
quarter election by comparing the response defining gross receipts for such organizations. 45 In December
preceding calendar quarter in 2021 to the
same calendar quarter in 2019 to determine 2020, the CARES Act was retroactively amended to change the definition
whether the gross receipts were less than of gross receipts applicable to tax-exempt entities. 46
80 percent of the gross receipts of the
quarter in 2019.
Source: GAO analysis of the CARES Act. | GAO-26-107456 The initial CARES Act ERC definition of a decline in gross receipts also
complicated IRS’s efforts to try to confirm gross receipt losses to
determine eligibility. Specifically, according to IRS chief counsel officials,
the concepts and measures of gross receipts are more applicable to
income, rather than employment taxes. Gross receipts in the income tax
context are generally used to determine profit and, therefore, tax liability.
In the employment tax context, gross receipts are not necessary to
calculate employment tax liability. Employers are required to withhold a
portion of an employee’s wages for purposes of paying employment
45Internal Revenue Service, “COVID-10-Related Employee Retention Credits:
Determining When an Employer is Considered to Have a Significant Decline in Gross
Receipts and Maximum Amount of an Eligible Employer’s Employee Retention Credit
FAQs,” accessed June 22, 2020.
46Pub. L. No. 116-260, § 206(a), 134 Stat. 1182, 3059-3060 (2020). IRS Notice 2021-20
stated that prior to the changes made by the Relief Act, section 448(c) of the Internal
Revenue Code applied to determine gross receipts of tax-exempt organizations.
Page 19 GAO-26-107456 COVID-19 Relief
taxes. Operating business income generally is not needed for
employment tax purposes.
As we discuss later in this report, IRS did not require employers to report
the dollar amount of declines in gross receipts when filing an ERC claim,
making it difficult for IRS to confirm eligibility without a resource-intensive
examination. As a result, IRS reviewed annual income tax information,
according to IRS documents.
Question for policymakers to consider for future emergency economic relief
Are definitions or eligibility criteria clear and straight-forward to report and verify?
Source: GAO. | GAO-26-107456
Retroactive Changes to Three laws enacted in 2020 and 2021 retroactively changed the first
Eligibility Increased Amended version of the ERC in the CARES Act. These changes expanded ERC
Return Filings and Improper eligibility, most notably by allowing employers who had a forgiven
Payment Risk Paycheck Protection Program (PPP) loan to also claim the ERC. These
laws changed other eligibility criteria, including gross receipts thresholds.
The laws also changed the maximum dollar amount of qualified wages an
employer could claim. Figure 3 shows eligibility periods for each law, and
corresponding retroactive eligibility.
Page 20 GAO-26-107456 COVID-19 Relief
Figure 3: Employee Retention Credit Legislative Changes Related to Eligibility
aARPA expanded Employee Retention Credit (ERC) availability to recovery startup businesses for
the third and fourth quarter of 2021. The IIJA retroactively limited the ERC to only recovery startup
businesses in the 4th quarter of 2021.
bRecovery startup businesses were employers that opened after February 15, 2020, with average
annual gross receipts under $1 million during the past 3 years.
The retroactive changes were often effective immediately after the laws
were passed. As a result, IRS officials and two experts said IRS had little
time to implement them, such as developing new processes or issuing
updated guidance. According to some members of a payroll professionals
group we interviewed, in some cases employers filed ERC claims based
on outdated IRS guidance.
Increased amended return filings. As ERC eligibility expanded,
amended return claims increased. Approximately 86 percent of ERC
claims were filed on amended returns, mostly on Form 941-X, through
Page 21 GAO-26-107456 COVID-19 Relief
mid-2025. 47 Because IRS did not enable electronic filing of Form 941-X
until mid-2024, the manual processing of millions of paper-filed forms
created a large administrative burden for IRS that delayed processing
times and ERC disbursements. 48
Improper payment risk. Legislative changes made ERC more generous
through increased credit maximums. As ERC became more generous,
there were uncertainties and promoters exploited employers who were
not sure how to navigate the rules, according to IRS counsel. Promoters
contributed to the high number of improper claims, as described in IRS’s
Dirty Dozen lists in 2023 and 2024. 49 The scams raised the importance of
tax compliance efforts, according to IRS officials. IRS generally has 3
years to assess tax from compliance actions, such as certain overclaimed
ERC. Due to pandemic and ERC-specific factors—such as processing
delays—IRS initially had a narrower window for post-refund assessments.
However, as we described above, legislation enacted in July 2025
extended the statute of limitations on tax assessments of certain ERC
claims to 6 years. 50
Question for policymakers to consider for future emergency economic relief
If considering retroactive provisions, do the benefits outweigh the administrative challenges and improper payment
risks?
Source: GAO. | GAO-26-107456
47According to IRS data on processed ERC claims through June 25, 2025, about 86
percent of claims were filed on Form 941-X and 13 percent were filed on Form 941. About
1 percent were filed on Forms 943, 943-X, 944, and 944-X. Available IRS data did not
segregate this 1 percent of claims into amended or original returns.
48In January 2025, we reported that IRS made 20 more tax forms available to file
electronically during the first 6 months of 2024, and that most of these forms were used by
businesses. See GAO-25-107375.
49Compiled annually, IRS’s Dirty Dozen lists a variety of common scams and schemes
that taxpayers may encounter.
50Pub. L. No. 119-21, § 70605(e), 139 Stat. 72, 288 (2025).
Page 22 GAO-26-107456 COVID-19 Relief
Benefit of Advance Payments The CARES Act included a provision for employers to receive advance
Uncertain ERC payments, prior to the end of a quarter. 51 IRS data indicate that
employers did not file for the advance payments as much as might have
been anticipated. Overall, filings for advance payments were relatively
low. Advance COVID-19 employment tax credits amounted to about $1.4
billion, which was less than 1 percent of the total refund dollars claimed
on original returns. 52 The fact that employers were instructed to reduce
employment tax deposits for anticipated ERC amounts may have
contributed to the low filings because they did not have a refund balance
eligible for advance payment. 53
Further, quarterly employment tax filings are already more frequent than
income taxes and employers could reduce employment tax deposits
throughout the quarter if they qualified for ERC. This may indicate that
employers did not see much of a benefit in completing and filing a
different form to receive an advance payment. It is also possible the
advance payments in 2020 were low, in part, because of the prohibition at
that time on claiming ERC if the employer received PPP loan forgiveness.
After federal law was amended in December 2020 to remove this
restriction, IRS officials said there was an increase in filings on Form
7200, Advance Payment of Employer Credits Due to COVID-19.
By April 2020, IRS had developed Form 7200 and an electronic fax
system for employers to file for advance payments, helping to bypass
mail-related delays. Despite the fax system, processing times averaged
as high as 7 weeks. Given this turnaround time, it is possible that an
employer filing for an advance payment during the last month of a quarter
through the end of the quarter due date may have received a refund
faster by e-filing Form 941 at the end of the quarter. 54 Paper processing
51Form 7200, Advance Payment of Employer Credits Due to COVID-19, could be filed for
an advance ERC payment anticipated for a quarter at any time before the end of the
month following the quarter in which the qualified wages were paid. If necessary, Form
7200 could be filed several times during each quarter.
52Internal Revenue Service, Internal Revenue Service Data Book, 2022, Publication 55-B
(Washington, D.C.: March 2023). Data include ERC, sick and family leave credits, and
COBRA premium credits, as separate data could not be extracted for each. Advance
credits were reported and reconciled on original returns.
53For more information on how employers filed for ERC, see Goodman, L, “Delivering Aid
to Businesses Through the Payroll Tax System: The Case of the Employee Retention
Credit,” National Tax Journal, volume 76, number 2, June 2023.
54Form 941 is due 1 month after the end of each quarter. For example, the first quarter
Form 941 is due April 30.
Page 23 GAO-26-107456 COVID-19 Relief
times for Form 941 credits could take up to several months, according to
payroll and tax professionals.
Question for policymakers to consider for future emergency economic relief
If considering offering advance payments for an employment tax credit, do the benefits outweigh the administrative
costs and challenges?
Source: GAO. | GAO-26-107456
Lack of Explicit Statutory Data The CARES Act did not provide an explicit grant of statutory authority to
Sharing Provisions Affected the Small Business Administration (SBA)—the agency administering the
IRS’s Ability to Obtain PPP PPP—to share data on PPP loans with IRS. The CARES Act, which
Data and Necessitated an established the ERC and PPP, prohibited employers from claiming both
Agreement ERC and obtaining a PPP loan. Recognizing the need to share data
relative to their respective responsibilities under the ERC and PPP, IRS
and the SBA started negotiating an agreement under their pre-existing
authority for SBA to share limited PPP data in April 2020. The data-
sharing memorandum was finalized in September 2020. 55
Access to PPP loan data enabled IRS to more easily screen ERC claims
for potential noncompliance with the rules restricting employers from
using both programs (see appendix III for information on actions IRS took
to do so). An IRS official stated it would have been helpful in the
legislation to have greater clarity around what data can be shared and
with whom. A direct grant of statutory authority for SBA to share PPP data
with IRS, for example, could have facilitated IRS’s initial compliance
efforts to ensure that employers with PPP loans were not also trying to
claim the ERC.
In December 2020, federal law was amended to remove the restriction
that had prohibited employers from both applying for PPP loan
forgiveness and claiming the ERC. 56 However, a limitation was added that
employers could not count the same payroll expenses when claiming
ERC and obtaining PPP loan forgiveness. IRS and SBA subsequently
modified their data-sharing memorandum in 2021 to share more PPP
loan data from SBA. IRS could use the additional SBA data to help
55The Memorandum of Understanding (MOU) stated that “SBA is also authorized to enter
into this MOU under the Small Business Act, 15 U.S.C. §§ 634(a) and 634(b)(7). In
addition, the IRS enters into this MOU under the authority of Delegation Order 150-10, 26
U.S.C. §§ 7801 and 7803, which authorize the Commissioner of the IRS to enforce and
administer the internal revenue laws.”
56Pub. L. No. 116-260, § 206(c), 134 Stat. 1182, 3059–3061 (2020).
Page 24 GAO-26-107456 COVID-19 Relief
determine whether employers claiming ERC had used the same wage
amounts for PPP loan forgiveness.
IRS officials said that when considering future legislation that provides
emergency relief through the tax code, it would be helpful to include
language to explicitly permit inter-agency data sharing that could aid IRS
compliance efforts. An SBA official also said that having statutory
authority in advance is easier than establishing agreements. In other
situations where statutory restrictions have prohibited or limited data
sharing between agencies, we have previously recommended that
Congress consider addressing those restrictions. For example, we have
recommended that Congress provide Treasury with access to the Social
Security Administration’s full set of death records to prevent payments to
ineligible deceased taxpayers. 57
Question for policymakers to consider for future emergency economic relief
If the relief hinges on other federal programs not administered by the Internal Revenue Service (IRS), would
statutory provisions to permit data sharing between IRS and other agencies help facilitate IRS’s compliance efforts?
Source: GAO. | GAO-26-107456
57GAO-20-625. In December 2020, Congress passed, and the President signed into law
the Consolidated Appropriations Act, 2021, which required the Social Security
Administration, to the extent feasible, to share its full death data with Treasury’s Do Not
Pay working system for a 3-year period. In March 2022, we recommended that Congress
consider making this data sharing requirement permanent. See GAO, Emergency Relief
Funds: Significant Improvement Are Needed to Ensure Transparency and Accountability
for COVID-19 and Beyond, GAO-22-105715 (Washington, D.C.: Mar. 17, 2022). Congress
passed the Ending Improper Payments to Deceased People Act (S. 269 and H.R. 2716),
which contains provisions that would address this matter. The Senate passed S. 269 on
September 19, 2025 and the House passed this bill on January 12, 2026. As of January
2026, legislation had not been enacted.
Page 25 GAO-26-107456 COVID-19 Relief
Lessons Learned on Employee Retention
Credit Administration
We identified four lessons, each with
contributing factors.
Source: GAO. | GAO-26-107456
IRS Would Have Contributing Factors on Planning and Risks
Benefitted from Having a • The Internal Revenue Service (IRS) did not fully leverage project
Comprehensive Plan for management practices
Managing ERC Risks • The Employee Retention Credit improper payment risk assessment
was late and required follow-up not completed
• IRS did not effectively leverage its risk management processes
Source: GAO analysis. | GAO-26-107456
IRS Did Not Fully Leverage In 2022, we reported that IRS’s plans to address potential ERC
Project Management Practices noncompliance partially demonstrated relevant project management
practices we selected for review. 58 We found, for example, that IRS’s
plans did not include measurable objectives and that plans for
coordination among IRS units were inconsistent and incomplete.
Specifically, the Office of Fraud Enforcement’s Fabricated Entities
Project, which focused on identifying fraudulent entities claiming COVID-
19 employment tax credits, was not included in ERC planning documents.
The Fabricated Entities Project prevented payment of hundreds of
millions of dollars in improper ERCs and also led to criminal investigation
referrals. We recommended that IRS develop an integrated project
management plan for the COVID-19 credits, including ERC.
IRS disagreed with the recommendation but as of March 2025, IRS made
progress in implementing some components of a project plan. For
example, IRS documented leadership decision approvals and data
analyses that informed decision-making and documented stakeholder
involvement, with the creation of the Servicewide ERC Team. However,
58GAO-22-104280. We assessed IRS’s planning documents against criteria from Project
Management Institute, Inc., A Guide to the Project Management Body of Knowledge
(PMBOK® Guide), Sixth Edition (Newtown Square, Pa.: 2017). PMBOK is a trademark of
Project Management Institute, Inc. The PMBOK® Guide includes proven traditional
practices that are widely applied, as well as innovative practices that are emerging, in the
field of project management. PMBOK® is a trademark of Project Management Institute,
Inc. The Project Management Institute is a not-for-profit association that provides global
standards for, among other things, project and program management.
Page 26 GAO-26-107456 COVID-19 Relief
as of August 2025, it did not have a project plan with measurable
objectives or defined and sequenced scheduled activities.
More timely and full implementation of our prior recommendation could
have helped IRS prepare to respond to the surge of questionable ERC
claims in 2023 and promoters of those claims. Further, compliance
activities continue for ERC claims. As of December 31, 2025, about
41,000 claims remain in examination or appeals, according to IRS
officials. Employers can file an appeal anytime within 2 years of a
disallowance letter. Although the statute of limitations for assessing tax on
certain paid improper ERCs has expired, IRS can still pursue fraud cases
indefinitely. We maintain that with measurable objectives, performance
measures, comprehensive planning documents and schedule
management, and other practices, IRS would be better positioned to
move forward with compliance activities for ERC.
ERC Improper Payment Risk In May 2022, the Treasury Inspector General for Tax Administration
Assessment Was Late and (TIGTA) found that IRS was late in conducting a statutorily required
Required Follow-Up Not improper payments risk assessment on ERC. 59 The assessment should
Completed have been completed after ERC had been in operation for 12 months (by
April 2021). However, IRS did not complete it until February 2022. 60 IRS
officials told TIGTA they did not complete the assessment on time
because they misinterpreted which U.S. Coronavirus Refundable Credit
fund account was included under the requirement. 61
When IRS did complete the improper payment risk assessment, the
agency concluded that ERC was susceptible to significant improper
59Treasury Inspector General for Tax Administration, Programs Susceptible to Improper
Payments Are Not Adequately Assessed and Reported, 2022-40-037 (Washington, D.C.:
May 6, 2022). Agencies are required to complete improper payment risk assessments to
determine whether their programs may be susceptible to significant improper payments.
Significant improper payments are defined as those that, in the preceding fiscal year, may
have exceeded either (1) $100 million, or (2) $10 million plus 1.5 percent of the total
amount of program outlays. The Payment Integrity Information Act requires agencies to
conduct improper payment risk assessments for each of their programs at least once
every 3 years. 31 U.S.C. § 3352(a).
60For newly established programs, Office of Management and Budget (OMB) guidance
states that risk assessments should be completed after the first 12 months of the program.
OMB Circular A-123, Appendix C, Requirements for Payment Integrity Improvement, OMB
M-21-19 (Washington, D.C.: Mar. 5, 2021).
61TIGTA, report 2022-40-037.
Page 27 GAO-26-107456 COVID-19 Relief
payments. 62 The identified risk factors included complexity of the credit,
volume of payments, and recent significant changes in program policies
and procedures.
IRS officials confirmed, however, that they did not conduct specific follow-
up steps in response to the 2022 risk assessment, as required by the
Payment Integrity Information Act (PIIA). 63 If a program such as ERC is
identified as susceptible to significant improper payments, the agency
must, among other things, (1) develop an estimate of improper payment
rates, (2) identify the root cause for improper payments, (3) develop a
corrective action plan, and (4) report on the results of these
requirements. 64 PIIA also requires each agency’s inspector general to
issue an annual report on the agency’s compliance with applicable PIIA
criteria. 65
In August 2022, Treasury sent a memorandum to the Office of
Management and Budget (OMB) stating that due to the short time frame
over which the majority of disbursements would be made by the COVID-
19 related programs for which Treasury was responsible, quantifying the
amount and rate of improper payments, assessing the root cause, and
developing corrective action plans to reduce payment errors in the future
would have provided minimal value and been an ineffective use of
resources.
Treasury specifically stated that many of the COVID-19 related programs
would have completed disbursements before an improper payment
estimate was due, approximately 3 years into a program. Based on OMB
guidance, an improper payment estimate for ERC (which began in 2020)
would have been due for fiscal year 2023. Further, developing timely
estimates for fiscal years 2023 and 2024 would have been relevant,
62In addition to the 2022 assessment, IRS also completed an assessment on ERC in
2024. In that assessment, IRS determined that ERC was susceptible to significant
improper payments. We did not assess IRS’s determination.
6331 U.S.C.§ 3352.
6431 U.S.C. § 3352 and OMB M-21-19. Under PIIA, if during an improper payment review
an agency is unable to determine whether a payment was proper because of lacking or
insufficient information, it must treat the payment as improper for purposes of producing
an estimate.
6531 U.S.C. § 3353.
Page 28 GAO-26-107456 COVID-19 Relief
because after fiscal year 2022 about $183 billion in ERC claims have
been paid. 66
In its response to Treasury’s August 2022 memorandum, OMB
acknowledged receipt of Treasury’s statements. 67 TIGTA acknowledged
Treasury’s memorandum to OMB, but did not identify the lack of follow-up
for ERC as noncompliance with applicable PIIA criteria in its May 2025
required annual report to Congress. 68 In a report covering PIIA
compliance for fiscal year 2024, the Treasury Inspector General also
acknowledged that IRS did not calculate or report improper payment rates
for ERC, but did not make any statements about ERC PIIA compliance. 69
A TIGTA official told us that they considered IRS to be compliant with
PIIA because of OMB’s acknowledgement of the August 2022
memorandum.
In 2025, IRS officials stated that the agency had taken actions to address
ERC risks after the February 2022 risk assessment, such as increased
scrutiny of large and questionable claims. To some degree, these efforts
likely helped address improper payment risks. However, by not
completing required PIIA improper payment estimates, IRS is unlikely to
be able to determine the extent to which improper payments occurred.
For example, in 2023, IRS publicly stated that it believed that many ERC
claims were likely ineligible and cited anecdotal descriptions from tax
professionals that 95 percent or more of recent claims were likely
ineligible. 70
Further, without an estimate, IRS may not be able to identify root causes
for ERC improper payments, or develop effective mitigation strategies
and corrective actions. 71 Once an agency has gained insight into payment
66Based on IRS data as of June 25, 2025.
67OMB guidance cannot authorize exemptions to applicable PIIA requirements for
improper payment estimation and reporting. 31 U.S.C. § 3352(g)(1).
68TIGTA report, 2025-400-025.
69Office of Inspector General, Department of the Treasury, Financial Management: Audit
of Treasury’s Compliance with the PIIA Requirements for Fiscal Year 2024, OIG-25-27
(Washington, D.C.: May 27, 2025).
70Internal Revenue Service, “To protect taxpayers from scams, IRS orders immediate stop
to new Employee Retention Credit processing amid surge of questionable claims;
concerns from tax pros,” IR-2023-169 (Washington D.C: Sept. 14, 2023).
71According to OMB guidance, a root cause is something that would directly lead to an
improper payment, and if corrected, would prevent the improper payment. OMB M-21-19.
Page 29 GAO-26-107456 COVID-19 Relief
integrity risks and the root causes of improper payments for a program,
the agency can then take action to develop and implement effective
mitigation strategies and corrective actions and coordinate across the
agency on similar challenges. Improper payment estimates and related
reporting also provide important information to Congress and taxpayers
on agencies’ use of taxpayer funds and progress in the prevention and
recovery of improper payments. This information is particularly important
for emergency assistance programs such as ERC, which carry higher
risks of improper payments.
We have previously reported on the importance of agency oversight of
compliance with PIIA criteria and timely reporting. We have also made
several recommendations to Congress on this topic, which remain open
as of January 2026. 72 Given the rapid timeline of emergency assistance,
time lags in assessing risk may result in improper payment issues,
including those resulting from fraudulent activities, not being identified or
addressed until after most or even all funds are disbursed. For
emergency assistance programs, especially large programs with possible
widespread improper payments, we have emphasized the importance of
estimating improper payments expeditiously, including during the initial
year of implementation.
IRS closed all remaining ERC claims, aside from those under
examination or appeal, by December 31, 2025, according to IRS officials.
New claims can no longer be filed. However, by developing an improper
payment estimate for ERC, IRS could help inform future design of
employment tax relief programs, if policymakers decide to create them.
72GAO-22-105715. We recommended that Congress should amend PIIA to designate all
new federal programs making more than $100 million in payments in any one fiscal year
as “susceptible to significant improper payments” for their initial years of operation. The
PIIA Reform Act (H.R. 1533), the STEP Act (S. 80), and the TRUE Accountability Act (S.
78) contain provisions that would address this or other PIIA- related matters. As of
December 2025, Congress has not passed these bills.
Page 30 GAO-26-107456 COVID-19 Relief
IRS Did Not Effectively IRS’s enterprise risk management and fraud risk management processes
Leverage Its Risk Management did not identify the specific compliance risks of ERC claims on amended
Processes returns in a timely manner. 73 The warning signs for potential ERC
compliance issues on amended returns started in 2021 as the number of
questionable claims grew, as shown in figure 4. 74 ERC was included in
risks related to refund fraud schemes in IRS’s annual Enterprise Risk
Profile in October 2023 and again in 2024. IRS included ERC in its Fraud
Risk Profile in December 2023. 75
73OMB stated that enterprise risk management is an effective agency-wide approach to
address the full spectrum of the organization’s risks by understanding the combined effect
of risks as an interrelated portfolio, rather than addressing risks only within silos.
Enterprise risk management provides better insight about how to most effectively prioritize
and manage risks. The Office of Management and Budget, Preparation, Submission, and
Execution of the Budget, Circular No. A-11, § 260.30 (2024). The 2024 version of this
document was in effect during most of our audit period. OMB released a new version in
August 2025. Fraud risk management activities may be incorporated into or aligned with
enterprise risk management, although this does not eliminate the need for separate and
independent fraud risk management efforts, such as a fraud risk assessment process.
74Prior to 2023, ERC was mentioned in a division level risk register, but compliance issues
on amended returns were not discussed. IRS identified other risks related to the ERC
sooner. For example, IRS identified some risks associated with data gaps in 2020, and the
effects of the backlog of amended returns in 2021 and 2022. IRS also identified the ERC’s
effects on income tax as an emerging issue in 2022.
75IRS conducts an enterprise risk assessment annually to develop the Enterprise Risk
Profiles. IRS does a Fraud Risk Assessment every 2 years to develop the Fraud Risk
Profiles, most recently completed in 2023, according to IRS officials.
Page 31 GAO-26-107456 COVID-19 Relief
Figure 4: Timeline of Internal Revenue Service’s Employee Retention Credit Risk Identification Actions
IRS’s February 2022 designation of ERC as susceptible to significant
improper payments risk should have triggered escalation of ERC to the
agency designated risk official for inclusion in the agency’s risk inventory,
per OMB guidance. 76 By March 2022, questionable ERC claims flagged
for examination had increased by over 10,000 percent. 77 In May 2022, we
reported that IRS had not documented processes to address compliance
risks for amended returns and we recommended that IRS do so. 78
The Internal Revenue Manual documents policies to help ensure
compliance with OMB’s enterprise risk management requirements. 79 IRS
also has a Risk Assessment Guide and Toolkit for facilitating risk
assessments within business units and programs. Both IRS documents
76OMB M-21-19.
77These are claims that meet a certain dollar threshold, or other criteria, requiring a review
for potential examination prior to processing. Changes were calculated based on monthly
data.
78GAO-22-104280. As of September 2025, IRS has partially addressed this
recommendation. IRS has documented its risk model for ERC amended return claims, and
documented the development of and criteria for sending recapture letters to amended
return filers. IRS has not yet provided documentation of how it is processing claims that its
risk model determined were “intermediate risk.”
79Internal Revenue Manual, section 1.4.60.
Page 32 GAO-26-107456 COVID-19 Relief
state that IRS is to use risk registers, monitor risks, and implement
internal controls.
Improper payment risk assessments can help inform enterprise risk
management and fraud risk management. An IRS official said the delay in
risk identification was because they were focused on implementing
CARES Act provisions and getting ERC claims processed. However,
several sources reported that the challenges IRS faced implementing
economic impact payments, and navigating pandemic-related office
closures and legislative changes had eased in 2022. 80 The IRS official
agreed IRS could have acknowledged the risks associated with
processing paper returns, the newness of the ERC, and its retroactive
provisions sooner.
Although IRS began adjusting its compliance process in 2022—such as
changing review criteria and capturing additional data—these actions
were not included in risk profiles. 81 Documenting risks and following a risk
management process facilitates risks being monitored and considered
relative to other agency risks, and resource allocation decisions. These
steps could have helped IRS better adjust its processes and reduce
improper payments in a timely manner, as discussed later in this report.
In October 2023, when ERC was first included in an agencywide risk
profile, IRS had just implemented a processing moratorium in the prior
month to give the agency time to develop a model to assess compliance
issues on amended returns (see appendix IV for details on IRS’s efforts in
this regard). 82 IRS established an ERC-specific risk register in March
2024. The text box below describes an example of another risk that IRS
80GAO, Federal Telework: Selected Agencies Need to Evaluate the Potential Effects on
Agency Performance, GAO-25-106316 (Washington D.C.: Nov. 22, 2024), and Stimulus
Checks: Direct Payments to Individuals during the COVID-19 Pandemic, GAO-22-106044
(Washington, D.C.: June 29, 2022); GAO,); Taxpayer Advocate Service, National
Taxpayer Advocate Annual Report to Congress 2022 (Washington D.C.: Jan. 11, 2023);
and Congressional Research Service, COVID-19 and the U.S. Economy, R46606
(Washington D.C.: May 11, 2021).
81In December 2022, IRS completed a Risk Acceptance Form and Tool, which
documented IRS’s decision-making for addressing the rise in large ERC claims. The Risk
Acceptance Form and Tool is optional and guidance states that the tool is not intended to
serve as documentation of a full risk assessment.
82When processing resumed, IRS did not announce that the moratorium was over.
Page 33 GAO-26-107456 COVID-19 Relief
initially overlooked—promoter schemes—for which better risk
management could have helped guide mitigation.
Risk management process could have helped the Internal Revenue Service
identify promoter schemes sooner
Promoters of Employee Retention Credit (ERC) schemes, a driver of improper ERC amended
return claims, were not mentioned in risk assessment documents until September 2024. The
Internal Revenue Service (IRS) started alerting employers about schemes promoting improper
ERC claims in October 2022. However, until 2024, IRS had limited tools to analyze social media,
where many ERC schemes were being promoted, according to IRS officials. Social media analysis
plays a pivotal role in identifying tax schemes, but it is resource intensive because of the training
and technology involved, according to Criminal Investigations (CI) officials within IRS. A risk
assessment that identified ERC amended return risk and promoters may have helped IRS to
prioritize social media analysis tools sooner. These tools could help IRS identify and shut down
promoters while schemes are active, rather than tracking them down after the issuance of
improper refunds.
Eventually, IRS took actions to build capacity to identify schemes promoted in social media going
forward and to engage with stakeholders, such as tax professionals. As a result of resource
prioritization, in March 2024, CI started developing searches to identify individuals and businesses
in social media and the dark web (a hidden part of the internet accessed using specialized
software), according to CI officials. In August 2024, IRS established the Coalition Against Scam
and Scheme Threats, which included state and tax industry stakeholders, to raise awareness and
educate taxpayers about social media schemes, beyond just ERC. These considerations of
resources, technology use, and partnerships could help IRS more quickly identify and address
compliance threats in the future.
Source: GAO. | GAO-26-107456
IRS Would Have Contributing Factor on Eligibility Reporting
Benefitted from Additional • Key eligibility information not required on employment tax returns
Eligibility Reporting
Source: GAO analysis. | GAO-26-107456
Key Eligibility Information Not IRS used data associated with employer identification numbers, such as
Required on Employment Tax business establishment dates, to screen and confirm employer identities
Returns to determine eligibility for ERC. Starting with second quarter 2020 Form
941 filings, IRS incorporated some high level ERC eligibility requirements
into employment tax returns. For example, Form 941 asked for total
qualified wages for ERC, but not for information related to specific
components of those wages. Additionally, Form 941 did not ask
employers for information about the two key statutory criteria, from the
CARES Act, for ERC eligibility: (1) whether they experienced either a
requisite decline in gross receipts, or (2) were under a government
suspension of operations order.
We recognize, as discussed previously, that statutory ERC eligibility
relied on new or unclear definitions. However, designing forms and
Page 34 GAO-26-107456 COVID-19 Relief
requesting eligibility information are decisions for IRS. Of the two key
eligibility criteria, declines in gross receipts may have been easier to
verify than information on government suspension of operations orders. 83
Most employers generally track gross receipts already for inclusion on
their income tax returns. Although an imperfect determinant of eligibility,
quarterly gross receipts information could have served as a data point in
initial screening, among other information, for compliance activities. IRS
could have also asked employers for more information about government
suspension orders used for eligibility, such as the source and time period.
IRS officials told us they could not be certain that requesting more
eligibility information from employers on existing tax forms would have
facilitated compliance efforts. They also had concerns about IRS’s
capacity to quickly process the additional information requested,
according to an IRS official. Later, IRS considered or implemented other
options.
• Attestation form. In 2023, IRS considered requiring an
attestation form to accompany new ERC claims. This form would
have requested that employers answer questions about eligibility,
accuracy, and preparation of their returns. IRS planned to use the
form to assess claims for processing or further review. Ultimately,
IRS officials said they decided against the attestation form
because of the correspondence it would create, necessitating
resources for response. Further, the timing for introducing the
form meant that a large group of ERCs were already allowed
without it, creating a disparity with employers who would need to
file it going forward, according to IRS officials.
• Narratives. A line on Form 941-X, as available during ERC’s filing
period, requests a detailed narrative explanation, in a text box, of
the corrections on the form. Although not specified in the
instructions, employers had the option to provide information
about eligibility in the box. IRS transcribed this box to check for
ERC information, but discontinued it because of its “minimal
impact” on data analytics. In a separate effort to inform
examination selection, IRS analyzed the text box contents with
83An employer may have qualified for ERC if it experienced a requisite decline in gross
receipts starting March 13, 2020, through December 31, 2021. Generally, this test could
be met by comparing the gross receipts of a calendar quarter in 2020 or 2021, to the
gross receipts of the same calendar quarter in 2019.
Page 35 GAO-26-107456 COVID-19 Relief
software, avoiding the need for manual reviews, according to IRS
officials.
• Eligibility checklist. In November 2023, IRS released an
interactive online ERC eligibility checklist, which included
questions about gross receipts and government orders. This was
an optional tool that was not available when ERC filing began and
results were not submitted to IRS. However, it could have helped
employers to confirm eligibility themselves and informed decisions
about whether to apply.
Requiring employers to address their eligibility at filing could have offered
benefits to the employer and IRS. Depending on execution—ranging from
asking for an attestation regarding eligibility, to answering questions, or
submitting documents—the requested information could have spurred
voluntary compliance or resulted in data to be used for screening. For
example, asking the employer to indicate how they were eligible for ERC
when they initially filed for the benefits—as done in a questionnaire sent
to employers under examination, shown in figure 5—would have
narrowed down eligibility scenarios. From here, IRS would have more
information on potential ineligibility risks, such as an employer claiming to
be under a government suspension of operations late in 2021.
Page 36 GAO-26-107456 COVID-19 Relief
Figure 5: Excerpt from Employee Retention Credit Examination Questionnaire, 2023
According to IRS officials, changing Forms 941 and 941-X was a labor-
intensive process that required programming. Further, as we have noted
in prior work, additional reporting on tax forms increases taxpayer
burden. 84
By not requiring information on the core eligibility requirements for ERC,
IRS had limited ability to identify ineligible employers to prevent or
recapture erroneous refunds. Instead, IRS had to use resource intensive
steps, such as examinations, to gather and assess eligibility information
after the initial filing. There are tradeoffs to seeking additional eligibility
84GAO, Tax Expenditures: Background and Evaluation Criteria and Questions,
GAO-13-167SP (Washington, D.C.: Nov. 29, 2012).
Page 37 GAO-26-107456 COVID-19 Relief
information with the initial filing. However, when coupled with the cost to
the government of improper ERC refunds, the time and staff costs
required for programming new form lines—an existing process—likely
would have been less than implementing the processing moratorium and
developing a model to assess ERC claims. For example, IRS was able to
release a revised Form 941 in about 3 months, to include COVID-19 tax
credits. By contrast, the ERC processing changes based on model results
continued through December 2025.
Manual Processing for Contributing Factors on Manual Processing
Amended Returns • Paper-only amended returns limited data use for compliance
Complicated Compliance • New electronic filing option does not fully address challenges
Efforts Source: GAO analysis. | GAO-26-107456
Paper-Only Amended Returns According to IRS documents, paper filings hampered IRS’s ability to
Limited Data Use for extract and analyze data from these paper forms and delayed their ability
Compliance to identify and mitigate promoters and fraud. About 86 percent of ERC
claims processed were filed on Form 941-X, which prior to mid-2024,
employers could only file on paper. 85
After IRS implemented the processing moratorium in September 2023,
IRS digitalized information from the paper forms through transcription
(manually keying in data) and an artificial intelligence program. IRS used
this information to develop its risk model, which applied tests and
eligibility factors to unprocessed ERC claims and sorted them into risk
categories (see appendix IV for more information). 86 IRS announced it
was starting to process certain ERC claims about 9 months after the
moratorium began, and over 3 years since statutory changes
necessitated amended filings for many new ERC claims. As of March
2025, an IRS official said they did not have plans to continue use of the
artificial intelligence program to digitize Form 941-X, aside from ERC
claims. The program was intended to help IRS clear the backlog of Forms
941-X.
Leveraging the experience from digitizing ERC data can help IRS address
any future digitization needs for paper returns. Easier access to more
85IRS data on processed claims through June 25, 2025.
86An example of litigation challenging IRS’s use of the risk model includes ERC Today
LLC et al. v. John McInelly et al., No. 2:24-cv-03178 (D. Ariz.). In April 2025, the US
District Court for the District of Arizona denied a motion for a preliminary injunction to halt
IRS’s use of an automated “risk assessment model” and to restore individualized
employee review of ERC claims. The case was on appeal as of December 2025.
Page 38 GAO-26-107456 COVID-19 Relief
data from paper returns could also help IRS improve its compliance,
customer service, and enforcement operations.
New Electronic Filing Option Making the Form 941-X available for electronic filing in 2024 was an
Does Not Fully Address important action towards modernizing employment tax administration. But
Processing Challenges IRS still faces challenges in increasing employers’ use of e-filing and
automating more downstream processing of amended returns. Tax
returns submitted on paper and that require manual processing have
outsized effects on IRS operations in that the processing takes longer,
uses more resources, and is more prone to errors. By contrast, e-filed
returns that are processed using automation generally only require
human intervention if the return has an issue.
Additionally, despite the electronic filing option, the back end processing
of these forms remains highly manual. E-filing allows for data on
amended returns to be transmitted to and validated and accepted by IRS.
However, once the electronically filed return is accepted, actual
adjustments to taxpayer accounts such as for ERC still need to be
manually processed by IRS employees.
The Treasury Inspector General for Tax Administration (TIGTA) reported
in March 2024 that IRS had approved funding to automate more
processing of amended individual income returns filed on Form 1040-X. 87
Individual taxpayers have been able to file Form 1040-X electronically
since 2020, but like the Form 941-X, the forms are still processed
manually. TIGTA estimated that fully automating the processing of Forms
1040-X would result in significant annual cost savings to IRS. 88
Although IRS has estimated that it will receive annually about five times
more Forms 1040-X than Forms 941-X for fiscal years 2025 to 2032, we
found that the Form 941-X volumes are still substantial enough, post-
ERC, to generate significant cost savings if IRS were to automate more
87Treasury Inspector General for Tax Administration, The IRS Continues to Reduce
Backlog Inventories in the Tax Processing Centers, 2024-406-020 (Washington, D.C.:
Mar.18, 2024).
88Treasury Inspector General for Tax Administration, Additional Actions Are Needed to
Reduce Accounts Management Function Inventories to Below Pre-Pandemic Levels,
2023-46-026 (Washington, D.C.: May 10, 2023). TIGTA estimated that IRS would save
about $322 million in annual costs by automating the processing of Form 1040-X. TIGTA
also stated these savings would be in addition to any interest paid to taxpayers as a result
of manual processing delays.
Page 39 GAO-26-107456 COVID-19 Relief
processing. 89 In fiscal year 2021, IRS received about 565,000 Forms 941-
X. By 2023, this amount had increased to 2.5 million, driven mostly by
ERC claims. For fiscal years 2025 to 2032, IRS has estimated that it will
receive on average 1 million Forms 941-X annually.
Agencies should proactively identify data they may need to verify
applicant identity and eligibility and resolve any barriers to accessing data
before an emergency occurs, according to A Framework for Managing
Improper Payments in Emergency Assistance Programs (Managing
Improper Payments Framework). 90 IRS’s reliance on time-consuming
manual processing of amended employment tax returns compounded the
challenges IRS faced in ensuring ERC compliance and led to significant
processing backlogs. As we reported in January 2025, IRS’s total
inventory of correspondence—which includes amended returns—was
nearly 7 million in November 2024, and about 1 million of this was related
to ERC claims. 91 According to IRS officials, as of June 2025, competing
priorities and limited resources were barriers to achieving automated
processing in the near term.
Underway as of June 2025, the IRS’s Zero Paper initiative aims to
leverage cloud-based technology to quickly extract data from tax
documents and send those documents as metadata directly into IRS
processing systems. Documentation that IRS provided did not specifically
state whether Form 941-X processing is included in the initiative’s scope.
ERC Servicewide Team officials said they were unsure of IRS’s plans for
Form 941-X processing improvements. Although electronic filing
facilitates the use of data for compliance purposes, faster refund
processing is not possible until more processing of amended returns can
be automated.
Including Form 941-X in IRS’s modernization efforts for processing and
data capture, such as in the Zero Paper initiative, could help reduce the
correspondence backlog. It could also help prepare IRS for any future
surge in claims on amended returns, particularly should legislation again
89At five pages of information requested, the 2025 Form 941-X is also longer than the
2024 (the most recent version available as of July 2025) Form 1040-X, which is two
pages. IRS estimates are from Internal Revenue Service, Fiscal Year Return Projections
for the United States, Publication 6292 (June 2025).
90GAO-23-105876, Principle 1, Commit to Managing Improper Payments, which includes
the practice of identifying data sharing opportunities
91GAO-25-107375.
Page 40 GAO-26-107456 COVID-19 Relief
provide emergency relief through the employment tax system. In a 2025
committee report, the House Committee on Appropriations recognized the
challenges of paper-based processes for employment tax credits. The
report directed IRS to brief the Committee on its approach to digitizing
941-X and Schedule R forms within 30 days after enactment of the
related appropriations act for fiscal year 2026. 92
ERC Implementation Contributing Factors on Communication
Could Have Benefitted • IRS actions in response to some tax practitioner feedback may have
from More Timely and reduced improper payments
Consistent • Guidance did not fully meet all tax practitioners’ and employers’ needs
Communication with • Information on processing status of ERC claims not regularly
Stakeholders communicated
Source: GAO analysis. | GAO-26-107456
IRS Actions in Response to IRS was responsive to stakeholder suggestions regarding some evolving
Some Tax Practitioner ERC challenges. Specifically:
Feedback May Have Reduced
Improper Payments • ERC Voluntary Disclosure Programs (VDP). 93 In December
2023 IRS announced an ERC VDP as an opportunity for
employers who claimed and received an ERC for which they were
not entitled to repay those funds at a discount. 94 IRS also offered
a second VDP in 2024. These programs were developed and
adapted in response to tax practitioner feedback, according to IRS
officials. The growth of ERC promoters and IRS communication in
2023 about ERC scams led to increased interest among
stakeholders for a VDP, according to IRS officials.
• Online Communications. IRS updated its website in response to
tax practitioner feedback. For example, IRS updated its ERC web
92House of Representatives, Committee on Appropriations, H. R. Rep. No. 119-236
(2025) (accompanying H.R. 5166, Financial Services and General Government
Appropriations Act, 2026). As of December 2025, the legislation had not been enacted.
93The VDP is an example of one of IRS’s actions to recapture post-refund ERCs.
However, according to the Managing Improper Payments Framework, a “pay and chase
model,” where efforts are made to identify and recover improper payments after they are
made, can be difficult and expensive.
94The first VDP was available December 2023 through March 22, 2024. A second VDP
was available August 15, 2024, through November 22, 2024. Participants in the first VDP
had to repay 80 percent of their ERC. Participants in the second VDP had to repay 85
percent of their ERC.
Page 41 GAO-26-107456 COVID-19 Relief
page and the online ERC eligibility tool based on feedback from
tax practitioners, according to IRS officials.
• Professional Responsibility Guidance. As a result of outreach
efforts to employers about possible excessive ERC claims, tax
professionals requested that IRS provide guidance on
professional responsibility obligations for clients’ ERC claims,
according to IRS officials. In response, IRS released a bulletin in
March 2023 with information on how tax professionals can ensure
they are meeting professional responsibilities when preparing
returns claiming ERC. 95
The VDP, website material, and professional responsibility guidance are
examples of IRS using lessons learned stemming from stakeholder input.
Developing programs and other responses that help address the cause of
stakeholder concerns can help IRS reduce improper payments, including
those stemming from fraud, in future relief efforts. 96
Guidance Did Not Fully Meet In 2022, we reported that IRS developed and revised guidance and tax
All Tax Practitioners’ and forms for the COVID-19 employment tax credits under tight timeframes
Employers’ Needs during the pandemic. IRS began releasing guidance and forms just days
after the CARES Act was enacted in March 2020. IRS continued to issue
updates as more legislation was enacted during the pandemic. IRS also
issued frequently asked questions (FAQ) and tax tips and held outreach
events. IRS continued to update FAQs in 2025 and issued legal
memorandums in 2023 through 2025 on issues such as third-party payer
claims and whether certain supply chain disruptions could qualify an
employer for ERC. 97 Several payroll and tax professionals told us that
some IRS guidance like FAQs was helpful, and they recognized the
95Internal Revenue Service, “Professional Responsibility and the Employee Retention
Credit,” Office of Professional Responsibility News Alert, 2023-02 (Washington D.C.: Mar.
7, 2023), https://www.irs.gov/pub/opr-taxpros/2023-02-professional-responsibility-and-the-
employee-retention-credit-R2-508-compliant.pdf.
96GAO-23-105876, Principle 4, Monitor the Effectiveness of Controls in Managing
Improper Payments, which includes the practice of analyzing root cause and developing
corrective actions.
97Internal Revenue Service, Liability of Certain Third-Party Payers for an Underpayment of
Certain Employment Taxes Resulting from Improperly Claimed Employment Tax Credit,
Memorandum AM 2024-001 (Washington, D.C.: Feb. 16, 2024:),
https://www.irs.gov/pub/lanoa/am-2024-001-corrected-version.pdf;and Whether an
Employer Experienced a Full or Partial Suspension of the Operation of a Trade or
Business under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act or
Section 3134 of the Internal Revenue Code due to a Supply Chain Disruption,
Memorandum AM 2023-005 (Washington, D.C.: July 21, 2023),
https://www.irs.gov/pub/lanoa/am-2023-005-508v.pdf.
Page 42 GAO-26-107456 COVID-19 Relief
challenges for IRS to issue new material quickly. Several stakeholder
groups also told us about examples where guidance was not issued
timely, or it was unclear.
For example, in March 2025, IRS issued guidance on when to amend
income tax returns that had passed the deadline for filing. 98 Some
employers may have continued to delay filing amended income tax
returns until IRS notified them about their ERC claim, according to the
FAQs and the Taxpayer Advocate Service. 99 IRS internal documentation
acknowledged that employer decisions about filing income tax
amendments may have been driven by the moratorium and length of time
to process the claims. A tax preparer group representative also told us in
2024 that they asked IRS for guidance on whether employers can use
protective claims in anticipation of an ERC refund. 100 IRS’s March 2025
guidance confirmed that a protective claim can be filed for the wage
expense deduction. It also stated that under special statutory rules,
employers could amend income tax returns in the years in which their
ERCs were finalized, allowing for income tax amendments beyond the
filing deadline. 101
In its annual report, released in January 2024, the Taxpayer Advocate
Service said that based on ERC implementation, IRS should ensure that
its guidance and procedures are timely, simple, and practical for both
taxpayers and IRS employees, and address any failures in processes
early. 102 An IRS official said delays issuing guidance can be attributed to
98Under 26 U.S.C.§ 6511(a) and 26 U.S.C. § 6513(c). IRS’s guidance came after the
deadline for filing an ERC claim for the 2020 tax year, which was April 15, 2024 and near
to the deadline for filing an ERC claim for the 2021 tax year, which was April 15, 2025.
99The Taxpayer Advocate Service is an independent organization within IRS that helps
taxpayers resolve problems with IRS. Taxpayers and congressional offices, on behalf of
constituents, can submit cases for assistance with the Taxpayer Advocate Service.
100A “protective claim” is a claim for credit or refund filed by the taxpayer to preserve the
right to pursue a refund based on the resolution of an issue contingent on future events
that may not be determinable until after the refund statute has expired. Taxpayers file
protective claims to ensure they meet the timeliness requirement.
101The March 2025 guidance stated that “special statutory rules” referred to here are
Section 2301(e) of the CARES Act for qualified wages paid between March 13, 2020, and
June 30, 2021. Section 3134(e) of the Internal Revenue Code for wages paid between
July 1, 2021, and Dec. 31, 2021.
102National Taxpayer Advocate, Annual Report to Congress, 2023 (Washington, D.C.:
Jan. 10, 2024).
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the multistep process for developing guidance and receiving approval,
among other things.
Additional guidance is generally no longer needed for ERC since the
credit can no longer be claimed. In the next section on applying lessons
learned, we further discuss how IRS can be better prepared in the future
to administer emergency relief through the employment tax system.
Information on Processing IRS has not provided timely updates on ERC processing and some IRS
Status of ERC Claims Not updates may have led employers to expect claim processing that was not
Regularly Communicated occurring. We previously reported that IRS launched a web page in
March 2024 that shows the receipt date (month and year) of
correspondence, which include amended returns. 103 However, the web
page did not provide information on how long taxpayers can expect to
wait for a response once IRS began to process their claims. Furthermore,
information on response time for processing ERC claims was not included
in the updates. 104 As of January 2026, IRS has not issued a news release
on the status of ERC processing since October 2024. In its 2024 annual
report to Congress, the Taxpayer Advocate Service highlighted IRS
procedures which instruct staff not to provide status or time frame
information on ERC claims. 105 Instead, staff were instructed to refer
phone inquiries to IRS news releases. Afterwards, staff could verify
receipt of a claim but not provide status information on processing. 106
During the processing moratorium that began in September 2023, IRS
provided high level updates about the processing status of ERC claims in
some news releases but did not announce that the moratorium is over.
103Internal Revenue Service, “Processing status for tax forms,” accessed Jan. 20, 2026,
https://www.irs.gov/help/processing-status-for-tax-forms. GAO, 2024 Tax Filing: IRS
Improved Live Service and Began to Modernize Some Operations, but Timeliness Issues
Persist, GAO-25-107375 (Washington, D.C.: Jan. 30, 2025).
104In 2022, we recommended that IRS estimate time frames for resolving IRS’s
correspondence backlog, monitor and update these estimates periodically, and
communicate this information to taxpayers and stakeholders. While IRS agreed with this
recommendation and has taken some action to implement it, as of August 2025, IRS does
not provide information on how long taxpayers can expect to wait for a response once IRS
begins to process forms or correspondence. As of November 2024, IRS officials stated
they do not intend to share this information with taxpayers and stakeholders. GAO, Tax
Filing: 2021 Performance Underscores Need for IRS to Address Persistent Challenges,
GAO-22-104938 (Washington, D.C.: Apr. 11, 2022); and GAO-25-107375.
105National Taxpayer Advocate, Annual Report to Congress, 2024 (Washington, D.C.:
Jan. 8, 2025).
106Internal Revenue Manual, section 21.7.2.7.2(5).
Page 44 GAO-26-107456 COVID-19 Relief
These news releases did not reflect actual time frames for processing and
were not updated after IRS did not meet its September 2023 processing
goal for pre-moratorium returns. Specifically:
• In September 2023, IRS stated that it would continue to process
ERC claims received prior to the moratorium, within a standard
processing goal of 180 days. 107
• In March 2024, IRS stated it was continuing to process claims
received prior to the moratorium. 108
• In June 2024, IRS stated that employers with “low risk” claims
received prior to the moratorium could receive payments later that
summer. 109
• In August 2024, IRS stated that it would start processing certain
ERC claims received between September 14, 2023, and January
31, 2024. 110
Based on the September 2023 and March 2024 press releases, an
employer with a pre-moratorium claim could reasonably expect that its
claim may be processed. However, IRS inventory reports showed a
steady inventory of 792,000 claims, from October 2023 to April 2024,
indicating that the expected progress was not being made on processing
claims. According to an IRS official, only hardship cases from Members of
Congress or the Taxpayer Advocate Service were processed during this
time. Several IRS staff who processed ERC said they spent part of their
time answering calls about ERC, when not processing claims.
According to the Managing Improper Payments Framework, federal
managers of emergency assistance programs should provide timely and
quality information to nonfederal entities, including guidance on program
107Internal Revenue Service, “To protect taxpayers from scams, IRS orders immediate
stop to new Employee Retention Credit processing amid surge of questionable claims;
concerns from tax pros,” IR-2023-169 (Washington, D.C.: Sept. 14, 2023).
108Internal Revenue Service, “IRS Employee Retention Credit compliance effort tops $1
billion threshold since fall,” IR-2024-78 (Washington, D.C.: Mar. 22, 2024).
109Internal Revenue Service, “IRS enters next stage of Employee Retention Credit work;
review indicates vast majority show risk of being improper,” IR-2024-69 (Washington,
D.C.: June 20, 2024).
110Internal Revenue Service, “IRS moves forward with Employee Retention Credit claims,”
IR-2024-203 (Washington, D.C.: Aug. 8, 2024).
Page 45 GAO-26-107456 COVID-19 Relief
implementation. 111 Further, IRS’s Taxpayer Bill of Rights states that
taxpayers have the right to be informed of IRS decisions about their tax
accounts and to receive clear explanations of the outcomes. 112
Regarding the accuracy of anticipated processing time frames described
in press releases, an IRS official said it took longer than expected to
develop the risk model and restart processing, which affected
communication updates. Litigation on ERC and challenges getting
material approved have prevented IRS from providing processing updates
since October 2024, according to IRS officials. 113 However, IRS could
have updated communication to reflect the reality of processing prior to
this, and IRS was able to issue a press release in March 2025
summarizing ERC criminal investigations. 114 IRS data, as of June 25,
2025, show that IRS had processed over 784,800 ERC claims since the
end of October 2024. Information gaps on processing left some
employers with uncertainties about their ERC and, in some cases,
challenges with cash flow, according to tax and payroll professionals.
In December 2025, we asked IRS for updates and documentation on the
status of ERC processing. In its comment letter for this report, IRS stated
that it had closed all ERC claims, aside from those under examination or
appeals, by December 31, 2025. 115 IRS did not provide documentation of
this milestone, or provide a definition of what it considers to be a “closed”
claim. As of January 2026, IRS has not made an announcement with this
111GAO-23-105876, Principle 5, Provide and Obtain Information to Manage Improper
Payments, including the practice of providing improper payment information to nonfederal
entities.
112Internal Revenue Service, “Taxpayer Bill of Rights 1: The Right to be Informed.” Last
modified June 26, 2025, https://www.irs.gov/taxpayer-bill-of-rights#informed.
113An example of litigation includes ERC Today LLC et al. v. John McInelly et al., No.
2:24-cv-03178 (D. Ariz.). In April 2025, the US District Court for the District of Arizona
denied a motion for a preliminary injunction to halt the IRS’s use of an automated “risk
assessment model” and to restore individualized employee review of ERC claims. The
case was on appeal as of December 2025.
114Internal Revenue Service, “Five years post-CARES Act: IRS-CI has launched 2,039
COVID fraud investigations totaling $10b in attempted fraud” (Washington, D.C.: March
26, 2025), https://www.irs.gov/compliance/criminal-investigation/five-years-post-cares-act-
irs-ci-has-launched-2039-covid-fraud-investigations-totaling-10b-in-attempted-fraud.
115The National Taxpayer Advocate’s Annual Report to Congress, released in January
2026, reported similar information attributed to IRS, and stated that the ERC backlog was
eliminated. Data analysis from the National Taxpayer Advocate in that report only
represent processing through December 8, 2025. See, National Taxpayer Advocate
Annual Report to Congress, 2025, (Washington D.C.: January 28, 2026).
Page 46 GAO-26-107456 COVID-19 Relief
status information. Such information would increase transparency and let
employers with previously pending claims know to expect
correspondence from IRS. Providing updates to the public about the
status of ERC claims remaining to be processed and estimates for
completion would help employers anticipate possible refunds, which can
help with business planning.
Additionally, employers will continue to call, write, or visit IRS to try to
obtain this information, and IRS will continue to struggle to meet demands
for taxpayer customer service.
As demonstrated by the lessons identified in this report, IRS’s existing
IRS Could Take Steps policies did not adequately equip it to effectively implement ERC. As of
to Be Better Prepared May 2025, IRS officials confirmed that although they have procedures for
compliance planning for when new legislation passes, they do not have
to Address Improper procedures specific to emergency legislation, such as any future
Payments in Future employment tax credits. IRS officials said the agency frequently
implements legislation on short notice, and they do not have a different
Emergencies process for emergency legislation. Some practices included in our
Managing Improper Payments Framework—such as those related to risk
management and internal control—are included in the Internal Revenue
Manual. 116 However, the manual does not document project planning
practices—such as developing measurable objectives and schedules with
activities, interdependencies, and sequencing—and practices specific to
emergency relief programs.
Preexisting internal control plans allow federal program managers to
adapt controls quickly when a program’s statutory requirements change in
an emergency, or when a new program is implemented as part of the
government’s response to an emergency. According to the Managing
Improper Payments Framework, managers should develop plans in
advance that have potential eligibility criteria and controls designed for
likely future emergencies. 117 Agencies can also apply lessons learned
116Internal Revenue Manual sections 1.4.60 (Enterprise Risk Management Program) and
1.4.2 (Monitoring and Improving Internal Control).
117GAO-23-105876. Principle 1, Commit to Managing Improper Payments, which includes
the practice of developing internal control plans in advance to prepare for future
emergencies.
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from past emergencies to help build a foundation to quickly respond to
and mitigate payment integrity risks in future emergencies. 118
IRS officials said IRS is experienced at quickly implementing legislation,
and emergency relief is not any different. However, this report, and our
prior work on ERC implementation, detail challenges and issues that IRS
did not sufficiently address. Therefore, a policy aimed at implementing
emergency employment tax relief linking to the Managing Improper
Payments Framework could help ensure that IRS is able to establish and
adapt, as appropriate and necessary, effective and efficient controls over
new or expanded employment tax relief during emergencies. 119
Each of these principles, listed below, would help IRS to be better
prepared to manage and process future employment tax credits during an
economic emergency.
• Commit to managing improper payments;
• Identify and assess improper payment risks, including fraud;
• Design and implement effective control activities;
• Monitor the effectiveness of controls in managing improper
payments; and
• Provide and obtain information to manage improper payments.
118GAO-23-105876. Principle 1, Commit to Managing Improper Payments, which includes
practice of applying lessons learned.
119To help strengthen internal controls across the federal government, in March 2022 we
recommended that Congress require the Office of Management and Budget (OMB) to
provide guidance for agencies to develop internal control plans that would then
immediately be ready for use in, or adaptation for, future emergencies or crises and
require agencies to report these plans to OMB and Congress. See GAO-22-105715. In the
118th Congress, the Taxpayer Resources Used in Emergencies Accountability Act (S.
5098) contained provisions that would address this matter. In the 119th Congress, the
TRUE Accountability Act (S. 78) contains provisions that would also address this matter.
As of January 2026, Congress has not passed a bill to address this recommendation.
Page 48 GAO-26-107456 COVID-19 Relief
Through June 25, 2025, IRS had processed nearly 5 million ERC claims.
ERC Refunds Peaked In total, the claims IRS processed were worth more than $283 billion, of
After Economic which about 82 percent of the dollars were filed on Form 941-X. 120 IRS
officials told us IRS closed all remaining ERC claims, aside from those
Conditions Had under examination or appeal, by December 31, 2025.
Changed
The ERC was created and updated when employers had challenges
Substantially from keeping employees on their payrolls in 2020 and 2021. Economic
2020 conditions in the second quarter of 2020 indicated a struggling economy
as the unemployment rate nearly tripled. However, unemployment had
improved substantially by 2022—the year with the highest dollar amount
of ERC claims process—while another economic indicator, inflation, had
gotten worse. Further, as a result of the large number of claims filed on
amended returns, the issuance of refunds lagged for the quarters for
which they were claimed by a significant margin. According to National
Taxpayer Advocate data, average processing times ranged from a low of
71 days for returns processed in 2022 to a high of 546 days for returns
processed in the first part of 2025. 121 This meant that receipt of most ERC
refund dollars did not align with some of the worst economic conditions.
Though ERC was created and updated when employers needed support
in 2020 and 2021, due to COVID-19 when the unemployment rate was
elevated, IRS processed few claims during that time period.
Unemployment peaked in 2020, at 13 percent in the second quarter.
Unemployment averaged approximately 9.5 percent from the second
through the fourth quarters, when fewer than 80,000 ERC claims were
processed (fig. 6). Conversely, in 2022 when the unemployment rate had
returned to its pre-pandemic level (under 4 percent), there were more
than 1.6 million ERC claims processed. During the ERC processing
moratorium, IRS stopped processing most claims between September
2023 and the summer of 2024.
120The June 2025 data were the most recent available during our audit period. These data
include adjustments to amended returns that may have occurred after processing, such as
tax assessments from examinations and recapture letters, and reductions from the
Voluntary Disclosure Program (VDP) or the withdrawal process. Much of these
adjustments—billions of dollars from letters, VDP and withdrawals—occurred in 2024 or
2025. Therefore, the total refund dollars we report are lower than the gross amounts
refunded.
121National Taxpayer Advocate, Objectives Report for Congress, Fiscal Year 2026. Data
are through May 29, 2025.
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Figure 6: Employee Retention Credit Processed Claims and Unemployment Rates, 2020—2025
Notes: IRS data are through June 25, 2025. The number of claims is higher than the number of
employers who received an ERC; an employer can file multiple amended return claims for 1 quarter,
and claims for multiple quarters. Quarters are based on when IRS processed the ERC claims, which
may be a later quarter than when IRS received the claims. Unemployment rates are seasonally
adjusted, and represent the number of unemployed persons as a percentage of the labor force aged
16 years and over.
Most of the ERC refunds were issued in 2022 through 2025, after
unemployment had returned to near pre-pandemic levels. IRS processed
approximately $48 billion in ERC claims in 2020 and 2021 (fig. 7). In
contrast, IRS processed approximately $94 billion in claims in 2022 and
$89 billion in 2023, despite the ERC processing moratorium. In total, for
2022 through June 25, 2025, about $235 billion in ERC refunds were
processed, representing about 83 percent of the total refund dollars.
Page 50 GAO-26-107456 COVID-19 Relief
Figure 7: Employee Retention Credit Refunds and Unemployment Rates, 2020—2025
Notes: IRS data are through June 25, 2025. The data include adjustments to amended returns that
may have occurred after processing, such as those from compliance activities, the Voluntary
Disclosure Program or the withdrawal process. Therefore, the total refund dollars we report are lower
than the gross amounts refunded. Quarters are based on when IRS processed the ERC claims,
which may be a later quarter than when IRS received the claims. Unemployment represents the
number of unemployed persons as a percentage of the labor force aged 16 years and over, averaged
over the year.
The recovery from the pandemic was associated with an increase in
inflation, and we have tracked inflation as a key indicator of the economic
condition of the nation following the pandemic. 122 The inflation rate
changed significantly from where it was in 2020 to the time when most of
the ERC refunds were distributed, in 2022 through June 2025 (fig. 8). The
inflation rate averaged approximately 1 percent in the second through
fourth quarters of 2020, when less than $10 billion in ERC refunds were
distributed. By 2022, when approximately $94 billion in ERC refunds were
distributed, inflation had increased to an approximately 8 percent annual
average. Inflation remained elevated at more than 4 percent in the first
half of 2023, as an additional $78 billion in ERC refunds were distributed.
122GAO, COVID-19: Update on Key Indicators, the Federal Response, and
Implementation of GAO Recommendations, GAO-25-107588 (Washington, D.C.: July 31,
2025).
Page 51 GAO-26-107456 COVID-19 Relief
Figure 8: Employee Retention Credit Refunds and Inflation, 2020—2025
Notes: IRS data are through June 25, 2025. The data include adjustments to amended returns that
may have occurred after processing, such as those from compliance activities, the Voluntary
Disclosure Program or the withdrawal process. Therefore, the total refund dollars we report are lower
than the gross amounts refunded. Quarters are based on when IRS processed the ERC claims,
which may be a later quarter than when IRS received the claims. Inflation presented is the average of
the of the year-over-year change of the consumer price index for all urban consumers.
Both ERC and PPP were aimed at helping employers maintain payroll
during the pandemic. However, PPP disbursed more money and more
quickly than ERC (fig. 9). 123 By the end of the program in June 2021, PPP
had provided almost $800 billion, while ERC had provided about $283
billion through June 25, 2025. 124 The entirety of the PPP funding was
disbursed in 2020 and 2021 when unemployment was at its highest, while
123We have previously reported on the Small Business Administration’s (SBA) initial
limited PPP safeguards resulting in improper payments and fraud risks. See GAO,
Paycheck Protection Program: SBA Added Program Safeguards but Additional Actions
Are Needed, GAO-21-577 (Washington, D.C.: July 29, 2021).
124The deadline to apply for PPP loans was May 31, 2021, but SBA continued to process
pending applications in June 2021.
Page 52 GAO-26-107456 COVID-19 Relief
about 17 percent of the ERC refunds were distributed in the same
years. 125
Figure 9: Employee Retention Credit Refunds and Paycheck Protection Program Loan Approvals, 2020—2025
Notes: Internal Revenue Service data are through June 25, 2025. The data include adjustments to
amended returns that may have occurred after processing, such as those from compliance activities,
the Voluntary Disclosure Program or the withdrawal process. Therefore, the total refund dollars we
report are lower than the gross amounts refunded. Paycheck Protection Program loans were
administered in three phrases. The Small Business Administration data include loans approved from
April 3, 2020—June 30, 2021. Approved loans were to be disbursed within 10 calendar days.
Unemployment represents the number of unemployed persons as a percentage of the labor force
aged 16 years and over, averaged over the year. The unemployment rate for 2025 reflects the first 2
quarters of the year.
Timely and reliable improper payment estimates, and effective corrective
Conclusions action plans are key in helping to prevent and reduce improper payments.
IRS said it has closed most remaining ERC claims, new claims cannot be
filed, and the deadline for IRS to assess tax on certain underpayments
has passed. Nonetheless, developing an improper payment estimate and
conducting statutorily required follow-up activities can still help IRS and
125As IRS processes more claims and further data become available, the share of ERC
refunds processed in 2020 and 2021 will likely decrease.
Page 53 GAO-26-107456 COVID-19 Relief
policymakers understand and address financial vulnerabilities for future
emergency tax relief.
Ensuring that IRS IT systems are capable of processing and extracting
data from amended employment tax returns can expedite refund
processing and facilitate analysis for compliance purposes. This would
benefit employers and IRS staff, regardless of whether another
employment tax credit is enacted. IRS has a Zero Paper modernization
initiative underway, but documentation for that initiative does not specify
plans for including amended employment tax returns and ERC
Servicewide team officials were unsure of any plans.
Although IRS officials told us they had closed most remaining ERC claims
as of December 31, 2025, this information had not been communicated
publicly as of January 2026. In December 2025, we asked for updates
and documentation on the status of ERC processing. IRS did not provide
documentation of this milestone, and it did not define what it considers to
be a “closed” claim. Further, IRS has not communicated publicly about
ERC processing status since October 2024. Updating the public gives
employers a chance to ensure that they received communication from the
IRS on their claim, and can provide information on what employers can
expect. Such information can reduce uncertainty for employers expecting
a refund.
IRS can take steps to be better prepared for administering emergency
relief through the employment tax system in the future. We identified
instances where IRS did not identify, prevent, or address ERC improper
payments as effectively as it could have. The Managing Improper
Payments Framework details five key principles that IRS can use to be
better prepared in the future. By establishing policies that ensure the
agency adheres to these principles, IRS can be more effective in
identifying and addressing compliance risks and can minimize improper
payments in future emergency employment tax relief.
We are making the following four recommendations to IRS:
Recommendations for
Executive Action The Commissioner of Internal Revenue should develop and report an
improper payment estimate for ERC payments. (Recommendation 1)
Page 54 GAO-26-107456 COVID-19 Relief
The Commissioner of Internal Revenue should include amended
employment tax returns in its modernization efforts for processing and for
data capture. (Recommendation 2)
The Commissioner of Internal Revenue should update the public about
the current status of ERC claims. (Recommendation 3)
The Commissioner of Internal Revenue should develop policies to ensure
that—when implementing emergency employment tax relief—the agency
adheres to the five principles in GAO’s A Framework for Managing
Improper Payments in Emergency Assistance Programs.
(Recommendation 4)
We provided a draft of this report to Treasury, IRS, and SBA for review
Agency Comments and comment. IRS provided written comments, which are summarized
and Our Evaluation below and reproduced in appendix V. IRS and SBA also provided
technical comments, which we incorporated as appropriate. Treasury
officials said they did not have any comments.
In its written comments, IRS agreed with one recommendation, partially
agreed with one and disagreed with two.
Specifically, IRS disagreed with the recommendation to develop and
report an improper payment estimate for ERC (Recommendation 1). In its
letter, IRS suggested that the recommendation be modified to focus on
developing a lessons-learned summary related to ERC administration to
inform the design and oversight of future emergency tax relief programs.
IRS said developing a statistically valid improper payment estimate for
short-term programs is impractical and the cost would outweigh the
benefits. IRS also stated that an estimate would be several years
removed from the program. Further, it noted that a retrospective estimate
would be unlikely to yield reliable or meaningful information regarding
improper payments and would divert resources from higher-priority
compliance activities, according to IRS.
We maintain that developing an improper payment estimate for ERC will
help inform future emergency employment tax reform. There are
flexibilities in PIIA that could facilitate IRS developing an estimate that
provides information from claims across years, while acknowledging
resource burdens. PIIA requires each executive agency to produce a
statistically valid estimate, or an estimate whose methodology OMB has
Page 55 GAO-26-107456 COVID-19 Relief
approved, of improper payments made under any program identified as
susceptible to significant improper payments. 126
IRS could work with OMB on a methodology that produces valuable
information to guide future programs, but which does not fully meet
statistically valid thresholds. Notably, IRS would need an improper
payment estimate to develop a root cause analysis, which can identify
additional vulnerabilities for IRS to address in future emergency
employment tax relief administration. This analysis would be key in
completing other statutorily required reporting, such as reports on actions
to reduce and recover improper payments.
IRS agreed with the recommendation to include amended employment
tax returns in its modernization efforts for processing and for data
capture. (Recommendation 2).
IRS disagreed with the recommendation to periodically update the public
on ERC processing (Recommendation 3). IRS stated that it had closed all
ERC claims, other than those under examination or appeals, by
December 31, 2025. As described above, however, IRS did not provide
documentary evidence to support this statement or define what it means
by “closed.” Further, IRS has not reported this publicly. We maintain that
IRS should share this information publicly through its official
communication channels—such as IRS’s website. Doing so will provide
greater clarity for employers expecting a refund. Based on the IRS
response to our draft report, we revised the recommendation to focus on
the need to update the public on the current status of ERC claims.
IRS agreed with the intent of our recommendation to develop policies to
ensure that IRS adheres to the principles in our Managing Improper
Payments Framework when implementing emergency employment tax
relief (Recommendation 4). IRS agreed that the principles in the
Managing Improper Payments Framework provide a useful reference and
said it will consider how to further enhance its existing practices in future
emergency tax relief. IRS said many elements of these principles are
already incorporated in its approach to administering refundable tax
credits and emergency tax relief, such as early risk identification, internal
controls, monitoring, coordination and transparency. Similar to its
response to Recommendation 1, IRS said it believes a forward-looking
focus on policy and lessons learned will provide greater value than
retrospective improper payment estimates.
12631 U.S.C. § 3352(c)(1)(A).
Page 56 GAO-26-107456 COVID-19 Relief
We maintain that an improper payment estimate—which is only one of
several practices in the Managing Improper Payments Framework—can
help inform implementation of future emergency employment tax relief.
Further, as we found in this report, IRS experienced challenges with
several of the practices. For example, IRS did not timely assess and
identify improper payment risks, leading to a delayed implementation of
steps to address ERC risks.
We are sending copies of this report to the appropriate congressional
committees, the Commissioner of Internal Revenue, and other interested
parties. In addition, the report is available at no charge on the GAO
website at https://www.gao.gov.
If you or your staff have any questions about this report, please contact
me at LucasJudyJ@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made key contributions to this report are
listed in appendix VI.
Jessica Lucas-Judy
Director, Tax Issues
Strategic Issues
Page 57 GAO-26-107456 COVID-19 Relief
List of Congressional Committees
The Honorable Susan Collins
Chair
The Honorable Patty Murray
Vice Chair
Committee on Appropriations
United States Senate
The Honorable Mike Crapo
Chairman
The Honorable Ron Wyden
Ranking Member
Committee on Finance
United States Senate
The Honorable Bill Cassidy, M.D.
Chair
The Honorable Bernard Sanders
Ranking Member
Committee on Health, Education, Labor and Pensions
United States Senate
The Honorable Rand Paul, M.D.
Chairman
The Honorable Gary C. Peters
Ranking Member
Committee on Homeland Security and Governmental Affairs
United States Senate
The Honorable Tom Cole
Chairman
The Honorable Rosa L. DeLauro
Ranking Member
Committee on Appropriations
House of Representatives
The Honorable Brett Guthrie
Chairman
The Honorable Frank Pallone, Jr.
Ranking Member
Committee on Energy and Commerce
House of Representatives
Page 58 GAO-26-107456 COVID-19 Relief
The Honorable Andrew Garbarino
Chairman
The Honorable Bennie G. Thompson
Ranking Member
Committee on Homeland Security
House of Representatives
The Honorable James Comer
Chairman
The Honorable Robert Garcia
Ranking Member
Committee on Oversight and Government Reform
House of Representatives
The Honorable Jason Smith
Chairman
The Honorable Richard E. Neal
Ranking Member
Committee on Ways and Means
House of Representatives
Page 59 GAO-26-107456 COVID-19 Relief
Appendix I: Objectives, Scope and
Appendix I: Objectives, Scope and
Methodology
Methodology
This report (1) presents lessons learned related to the design and
administration of the Employee Retention Credit (ERC), (2) examines
how the Internal Revenue Service (IRS) can be better prepared to
address improper payments while managing emergency assistance
through the employment tax system, and (3) describes the economic
conditions surrounding ERC during and after the height of the pandemic.
To identify lessons learned from the design and administration of the
ERC, we conducted a literature review about the ERC, and we reviewed
our prior work on COVID-19 tax credits and the work of the Treasury
Inspector General for Tax Administration. We reviewed the Department of
the Treasury’s legislative proposals, submitted to Congress for fiscal
years 2022 to 2025, related to employment tax in the General
Explanations of the Administration’s Revenue Proposals. We reviewed
reports and legislative proposals from the National Taxpayer Advocate,
2021 to 2025.
In addition to reviewing relevant legislation, we analyzed IRS documents
such as the Internal Revenue Manual, procedures, leadership briefings,
research, guidance and online materials from 2020 to 2025. We analyzed
IRS data, ERC related examinations, compliance letters, fraud
investigations, and staffing levels, from fiscal years 2020 through 2024 or
2025.
We interviewed experts, tax and payroll professionals and agency officials
at various levels. Specifically:
• We contacted the three authors identified in our literature review
and met with the two who agreed to meet. We also contacted staff
from four public policy research organizations with experience in
tax policy, and we interviewed two staff members.
• We met with representatives and tax practitioners from the
National Association of Professional Employer Organizations, the
American Institute of Certified Professional Accountants, and
PayrollOrg to discuss their members’ experiences with ERC
implementation and their suggested lessons learned. Statements
from these interviews are used as examples and are not
generalizable to all payroll and tax professionals.
• We met with IRS officials from the Servicewide ERC Team, as
well as current and former executives leading ERC
implementation. Our interviews included officials from the Office of
Fraud Enforcement; the Office of Promoter Investigations;
Page 60 GAO-26-107456 COVID-19 Relief
Appendix I: Objectives, Scope and
Methodology
Criminal Investigations; Chief Counsel; Research, Applied
Analytics, and Statistics; and the Small Business and Self-
Employed division.
• We held discussion groups with 10 Customer Service
Representatives from IRS’s Taxpayer Services division who
processed ERCs claimed on amended returns. The participants
included one Customer Service Representative from discussions
held for our 2022 report, but were otherwise selected randomly
and represented both of the offices involved in ERC processing.
We discussed guidance provided to Customer Service
Representatives, training, feedback to management and lessons
learned.
• We visited the IRS campus in Covington, Kentucky to meet with
leadership from the Servicewide ERC Team and to observe
processing of ERCs claimed on amended returns.
• We also met with officials from the Small Business Administration
(SBA), the agency that administered the Paycheck Protection
Program (PPP), and Treasury.
Statements from these interviews are used as examples and are not
generalizable to all IRS staff, and payroll and tax professionals.
We compared the evidence from interviews and documents described
above with criteria from A Framework for Managing Improper Payments
in Emergency Assistance Programs. 1 The framework provides five
principles and corresponding practices that can help federal program
managers mitigate improper payments, particularly in emergency
assistance programs. The framework is also intended as a resource for
Congress to use when designing new programs in response to
emergencies. The framework incorporates payment integrity
requirements from the Payment Integrity Information Act of 2019, relevant
Office of Management and Budget (OMB) guidance and internal control
standards. 2 It also includes information derived from leading practices for
1GAO, A Framework for Managing Improper Payments in Emergency Assistance
Programs, GAO-23-105876 (Washington, D.C.: July 13, 2023).
2Pub. L. No. 116-117, 134 Stat. 113 (2020) (codified at 31 U.S.C. §§ 3351-3358); OMB
Circular A-123, Appendix C, Requirements for Payment Integrity Improvement (OMB M-
21-19); and GAO, Standards for Internal Control in the Federal Government,
GAO-14-704G (Washington, D.C.: Sept. 10, 2014).
Page 61 GAO-26-107456 COVID-19 Relief
Appendix I: Objectives, Scope and
Methodology
managing fraud risks in our Framework for Managing Fraud Risks in
Federal Programs. 3
To describe economic conditions surrounding ERC, we reviewed
literature and interviewed experts, as described above for our first two
objectives. We also analyzed tax return data from IRS, unemployment
and inflation data from the Bureau of Labor Statistics (BLS), and PPP
loan approval data from SBA.
IRS processed claims data are from IRS’s Compliance Data Warehouse,
Business Master File and Business Return Transaction File, which
include data from Forms 941, 943, and 944 and amended returns,
processed through June 25, 2025. We met with IRS officials to discuss
these data sources and their limitations. Specifically:
• The reported years are based on the date that the claims were
processed, which may be delayed from when they were received.
IRS provided data by weekly posting cycle, which we converted
into calendar quarters. Some cycles crossed quarters, and IRS
cycles do not precisely align with calendar weeks. Therefore, the
quarterly data we present may not exactly align with calendar
quarters. For example, IRS posting cycles for weeks 1 through 14
in 2025 do not align exactly with the calendar year first quarter
dates of January 1 to March 31.
• The data do not include Schedule R client information from third-
party aggregate filers. Therefore, our counts of employers
claiming the ERC are undercounts because the client lists from
Schedule R were not available.
• The data include adjustments to amended returns that may have
occurred after processing, such as tax assessments from
examinations and recapture letters, and reductions from the
Voluntary Disclosure Program (VDP) or the withdrawal process.
Much of these adjustments—billions of dollars from letters, VDP
and withdrawals—occurred in 2024 or 2025. Therefore, the total
refund dollars we report are lower than the gross amounts
refunded.
3GAO, A Framework for Managing Fraud Risks in Federal Programs, GAO-15-593SP
(Washington, D.C.: July 28, 2015).
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Appendix I: Objectives, Scope and
Methodology
We determined that the data were sufficiently reliable for the purpose of
describing general ERC processing trends.
The BLS data include the unemployment rate and inflation rate for second
calendar quarter 2020 through second calendar quarter 2025.
Unemployment rates are seasonally adjusted, and represent the number
of unemployed persons as a percentage of the labor force aged 16 years
and over. Inflation presented is the average of the of the year-over-year
change of the consumer price index for all urban consumers. 4 To assess
the reliability of these data, we reviewed officially published data
documentation from BLS. We determined that the data used in our
analysis were sufficiently reliable for the purpose of describing the
economic conditions at the time when ERC claims were processed.
We further used data on PPP loan approvals from SBA to compare the
volume and timing of ERC processing to PPP, which was also economic
relief to small business employers during the pandemic. 5 To assess the
reliability of these data, we reviewed data documentation, interviews with
agency officials, and checked the data to other published data sources.
We determined that the data were sufficiently reliable for the purpose of
comparing the volume and timing of claims for ERC and PPP.
We conducted this performance audit from February 2024 to February
2026 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 objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
4The consumer price index for all urban consumers represents inflation for the goods and
services purchased by about 93 percent of the U.S. population. It does not reflect the
spending patterns of people living in rural nonmetropolitan areas, those in farm
households, people in the Armed Forces, and those in institutions, such as prisons and
mental hospitals.
5Under PPP, lenders provided low-interest loans that were guaranteed by SBA to
qualifying small businesses and nonprofit organizations. Businesses could apply to have
the loans forgiven, if certain conditions were met. To qualify for full loan forgiveness, a
business had to use at least 60 percent of the loan amount for payroll costs, among other
requirements. An employer could not use the same payroll expenses to claim both the
ERC and to obtain forgiveness of a PPP loan.
Page 63 GAO-26-107456 COVID-19 Relief
Appendix II: Questions for Policymakers to Appendix II: Questions for Policymakers to
Consider for Future Emergency Economic
Consider for Future Emergency Economic
Relief
Relief
This report identifies two lessons, and nine contributing factors,
addressing the design of the Employee Retention Credit. 1 For each
contributing factor, we offer a question for policymakers to consider when
faced with decisions about future emergency economic relief. These
questions are based on our analysis of relevant literature, interviews with
agency officials and experts, and reviews of Internal Revenue Service
and legislative documentation, such as statutes and legislative proposals.
When considering future emergency economic relief, policymakers could
consider the questions in table 2.
Table 2: Design Lessons and Questions for Policymakers to Consider for Future Emergency Economic Relief
Offering Relief Through Employment Taxes Provides Potential Benefits and Unique Challenges
Will use of the employment tax or employment tax system provide timely relief to the intended population?
Does the Internal Revenue Service (IRS) have the capacity to use the employment tax system to implement relief efficiently?
Does federal law provide IRS sufficient statutory authority to assess penalties on erroneous claims for emergency economic relief to
help ensure compliance?
Are there any filing requirements or arrangements that could complicate IRS’s implementation and compliance efforts?
Are there implications of employment tax relief on income taxes? Issues to consider could include:
• Whether corresponding benefits from income tax are allowed.
• Whether the statute of limitations is sufficient for accommodating amendments to income tax returns.
• Whether income tax liability can be incorporated into employment tax calculations.
Some Design Decisions Increased Complexity and Improper Payment Risk
Are definitions or eligibility criteria clear and straightforward to report and verify?
If considering retroactive provisions, do the benefits outweigh the administrative challenges and improper payment risks?
If considering offering advance payments for an employment tax credit, do the benefits outweigh the administrative costs and
challenges?
If the relief hinges on other federal programs not administered by IRS, would statutory provisions to permit data sharing between IRS
and other agencies help facilitate IRS’s compliance efforts?
Source: GAO. | GAO-26-107456
1Our report also identifies four lessons on ERC administration, which discuss issues
specific to the Internal Revenue Service. Therefore, we did not offer questions for
policymakers.
Page 64 GAO-26-107456 COVID-19 Relief
Appendix III: Internal Revenue Service
Appendix III: Internal Revenue Service Actions
to Identify Employee Retention Credit Claims
Actions to Identify Employee Retention
Improperly Using Wages from Forgiven
Paycheck Protection Program Loans
Credit Claims Improperly Using Wages from
Forgiven Paycheck Protection Program
Loans
To aid businesses that were experiencing hardships during the COVID-19
pandemic, federal law established several programs to help employers
support and retain employees. These laws placed limits on how
employers could use one of these programs—the Paycheck Protection
Program (PPP)—together with the Employee Retention Credit (ERC).
PPP was administered by the Small Business Administration (SBA).
Under PPP, lenders provided low-interest SBA guaranteed forgivable
loans to qualifying small businesses and nonprofit organizations, referred
to collectively as “small businesses.” 1 Businesses could apply to have the
loans forgiven, if certain conditions were met. To qualify for full loan
forgiveness, a business had to use at least 60 percent of the loan amount
for payroll costs. If a business used less than 60 percent of the loan
proceeds on payroll expenses, then the borrower would be eligible for
partial forgiveness.
When the ERC was first created in March 2020, employers who had
obtained a PPP loan were prohibited from also claiming the ERC. 2
However, in December 2020, this ban was eliminated, and employers
were permitted to participate in both programs with some limitations.
Specifically, employers were prohibited from using the same payroll
expenses to claim both the ERC and to obtain forgiveness of PPP loans.
Payroll expenses reported on the PPP loan forgiveness application that
were deemed eligible for PPP were not eligible to be considered as ERC
qualified wages. 3
The statutory definitions of some terms further complicated IRS’s efforts
to ensure compliance. The PPP used the term “payroll costs” for loan
forgiveness, while ERC was calculated using “qualified wages.” The
CARES Act also provided different definitions of “qualified wages”
1We have previously reported that SBA made or guaranteed over $1 trillion in loans and
grants to over 10 million small businesses in 2020-2022 during the COVID-19 pandemic.
GAO, COVID-19 Relief: Improved Controls Needed for Referring Likely Fraud in SBA’s
Pandemic Loan Programs, GAO-25-107267 (Washington, D.C.: Mar. 24, 2025).
2Pub. L. No. 116-136, § 2301(j)134 Stat. 281 (2020).
3IRS Notice 2021-20, 2021-11 I.R.B. 922 (Mar. 15, 2021). See Pub. L. No. 116-260, §
206(c)(2)(A), 134 Stat. 1182, 3060 (2020).
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Appendix III: Internal Revenue Service Actions
to Identify Employee Retention Credit Claims
Improperly Using Wages from Forgiven
Paycheck Protection Program Loans
depending on the size of the employer, measured by the average number
of full-time employees. 4
Additionally, a PPP loan borrower’s “covered period” could affect the
wage amounts that could be used to claim the ERC. The PPP covered
period begins on the date a lender disburses the loan and ends on a date
selected by the borrower during the period between 8 weeks and 24
weeks after disbursement. This time period could differ from the ERC,
which was claimed on quarterly employment tax returns. Therefore, a
PPP loan’s covered period could potentially overlap with one to three
employment tax quarters.
PPP Data Sharing and To ensure compliance with the rules and limitations on using both
Matching Processes programs, the Internal Revenue Service (IRS) took several steps to
identify employers that had filed ERC claims but also applied for PPP
loan forgiveness. As of March 2025, IRS calculated that about 1 million
employers had participated in both programs. IRS also determined that
89 percent of these employers had at least 1 quarter with ERC claims that
overlapped with a PPP covered period. 5
To obtain data on PPP participants, IRS negotiated a memorandum of
understanding with SBA. 6 IRS officials described to us some challenges
they experienced in using the SBA data.
• Taxpayer identification numbers. Businesses could apply for
PPP loan forgiveness using either an Employer Identification
Number (EIN) or a Social Security number. ERC claims are based
on EINs, necessitating extra steps to match Social Security
numbers in the SBA loan forgiveness data with ERC claimants,
according to IRS officials.
• Loan periods and payroll tax quarters. IRS officials said it was
difficult to associate PPP payroll costs in a loan period with a
particular payroll tax quarter, or a portion of a quarter. The
4Pub. L. No. 116-136, § 2301(c)(3)(A), 134 Stat. 281 (2020).
5This overlap does not necessarily indicate noncompliance. For example, ERC qualified
wages may be from the first couple of weeks of the quarter, and the PPP covered period
may start at the end of the quarter.
6IRS and SBA completed a data sharing memorandum of understanding in September
2020. They modified this agreement to share more information after federal law was
amended in December 2020 to permit employers to participate in both ERC and PPP with
limitations.
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Appendix III: Internal Revenue Service Actions
to Identify Employee Retention Credit Claims
Improperly Using Wages from Forgiven
Paycheck Protection Program Loans
covered period—up to 168 days or 24 weeks—could coincide with
as few as one and as many as three tax quarters. According to
IRS officials, IRS did not request the PPP covered period data
because of these limitations.
• Self-reported payroll costs. Borrowers self-reported PPP payroll
costs on loan forgiveness applications, which presented reliability
issues. IRS officials also told us that SBA identified gaps in data
fields for loans of $50,000 or less.
Actions to Address ERC
Claims Improperly Using
Forgiven PPP Loan
Wages
Original Return Compliance IRS officials told us that they primarily relied on post-refund controls, such
as examinations, to identify improper ERC claims filed on original
employment tax returns. According to IRS officials, IRS could not
definitively determine if overlap existed between ERC and PPP without
conducting an examination.
IRS applied screening filters to employment tax returns to identify leads
for potential examinations. One of these filters used PPP loan information
SBA shared with IRS. According to IRS data, the filter identified a total of
96,653 EINs for tax years 2020 and 2021. Returns flagged by this and
other filters were sent for additional research and examination
consideration. Of the 96,653 EINs, IRS selected 652 for exam. For
selected returns, the filter results provided information for staff about the
possibility that the employer used the same wages for both programs,
according to IRS officials. Generally, if noncompliance was found, the
employer may have received a tax assessment.
Amended Return Compliance As discussed in appendix IV, prior to the processing moratorium, ERC
claims filed on amended employment tax returns (such as Form 941-X)
underwent manual processing. Certain ERC claims exceeding dollar
thresholds and other criteria underwent additional review for potential
examination. In 2021, IRS conducted limited transcription of these claims,
and later ran the data through several tests to screen for potential ERC
noncompliance, including one using PPP loan data. Returns failing a
certain combination of these tests were examined.
During the processing moratorium, IRS developed a risk model to analyze
unprocessed amended claims (see appendix IV). The model scored the
amended returns and assigned them one of three risk levels: “highest,”
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Appendix III: Internal Revenue Service Actions
to Identify Employee Retention Credit Claims
Improperly Using Wages from Forgiven
Paycheck Protection Program Loans
“unacceptable,” and “lowest.” 7 PPP loan forgiveness data were one of
several inputs in the model. According to IRS officials, returns from the
“unacceptable level of risk” category underwent an additional set of tests,
while those in the “highest risk” category were disallowed and those in the
“lowest risk” category were issued a refund.
7An example of litigation challenging IRS’s use of the risk model includes ERC Today LLC
et al. v. John McInelly et al., No. 2:24-cv-03178 (D. Ariz.). In April 2025, the US District
Court for the District of Arizona denied a motion for a preliminary injunction to halt IRS’s
use of an automated “risk assessment model” and to restore individualized employee
review of ERC claims. The case was on appeal as of December 2025.
Page 68 GAO-26-107456 COVID-19 Relief
Appendix IV: Internal Revenue Service
Appendix IV: Internal Revenue Service Efforts
to Address Ineligible Employee Retention
Efforts to Address Ineligible Employee
Credit Claims on Amended Returns
Retention Credit Claims on Amended
Returns
The Internal Revenue Service’s (IRS) efforts to identify ineligible
Employee Retention Credit (ERC) claims involved developing processes
for reviewing several forms, with a combination of pre-refund and post-
refund steps. This appendix describes the processing of ERCs filed on
amended returns. Compliance issues with originally filed returns—Forms
941, 943 and 944—were handled through examinations and other
processes.
Early Processing of ERCs IRS began processing ERC claims on amended returns in 2021. Prior to
Filed on Amended Returns mid-2024, amended returns, such as Forms 941-X and 943-X, could only
be filed on paper. Typically, the paper versions of these forms were not
transcribed (keying in return data), according to an IRS official.
IRS staff checked for return completeness and determined whether the
credit should be referred for possible examination, fully disallowed,
partially disallowed, or fully allowed. ERC claims that exceeded a certain
dollar threshold or met other criteria were referred for possible
examination. The criteria changed several times in 2022 and 2023 as a
backlog of returns developed and IRS tried to expedite processing. In
2021, IRS began transcribing limited data from amended returns and later
ran tests to aid in exam selection. A high percentage of the pre-refund
examinations referred to the IRS Small Business/Self-Employed division
resulted in a change to tax owed (about 99 percent in fiscal year 2023, 94
percent in fiscal year 2024).
Processing Moratorium In September 2023, IRS announced that ERC claims received after
and Risk Model September 14, 2023, were subject to a processing moratorium, originally
intended to last through December 2023. The moratorium was
Development
implemented to allow IRS to add more safeguards to prevent future
abuse and protect businesses from predatory tactics, according to IRS
officials. IRS used the time period of the moratorium to digitize amended
returns and to develop a risking model. 1 IRS ran over 1 million amended
returns through the model, sorting them into three risk categories. 2 See
figure 10.
1IRS transcribed some returns and used an artificial intelligence data extraction program
for other returns.
2Third-party payers were not included in this model because of the challenges of
identifying risk within a filing that represents more than one employer, according to an IRS
official.
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Appendix IV: Internal Revenue Service Efforts
to Address Ineligible Employee Retention
Credit Claims on Amended Returns
Figure 10: Employee Retention Credit Amended Return Processing for Claims Received After September 14, 2023
In June 2024, IRS announced that it would begin processing or denying
certain low-risk and high risk claims, starting in summer 2024. For the
remaining returns, IRS developed a second model to further analyze
them, according to IRS officials.
Additional Compliance In 2023 and 2024, IRS deployed several initiatives, aside from
Efforts examinations and letters, directed at ERC noncompliance.
• Withdrawal process. In October 2023, IRS offered certain
employers the opportunity to withdrawal their pending ERC
claims. This was intended to help employers who were pressured
or misled by ERC marketers or promoters into filing ineligible
claims. Employers were eligible to withdraw their entire claims if
their ERCs had not been paid yet, or if they received a check but
had not cashed or deposited it, among other requirements. As of
January 2025, there were $829 million in withdrawal requests,
according to IRS data.
• ERC Voluntary Disclosure Program (VDP). In December 2023,
IRS announced an ERC VDP, open through March 22, 2024.
Employers who claimed and received an ERC for which they were
not entitled could use VDP to repay the ERC, minus 20 percent of
the credit amount. In August 2024, IRS announced a second VDP,
running through November 22, 2024. The second VDP offered a
15 percent discount for tax periods in 2021, rather than 20
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Appendix IV: Internal Revenue Service Efforts
to Address Ineligible Employee Retention
Credit Claims on Amended Returns
percent. As of July 2025, IRS reports that it assessed nearly $1
billion through the VDP.
• Supplemental claims. To allow third-party payers an opportunity
to separate their clients’ claims and resolve incorrect claims, IRS
announced a supplemental claim process in September 2024. A
supplemental claim is an amended employment tax return that
allows the third-party payer to correct or consolidate unprocessed
claims, filed on or before January 31, 2024, if not yet processed.
Once a supplemental claim is accepted, IRS treats previous
claims as if they were never filed. According to IRS officials, this
will facilitate quicker determinations about allowing or auditing the
claim. Supplemental claims were accepted through December 31,
2024. IRS received 2,358 supplemental claims requests
representing about $2.8 billion in ERC claims. As of May 2025,
IRS approved about $444 million and it was still approving
requests.
• Letters. Additionally, IRS sent pre-refund letters to entities that,
based on when the employer was established and other factors,
did not appear to be eligible for ERC. Post-refund recapture letters
were issued to employers whose claims exceed statutory
maximum amounts.
Civil and Criminal Fraud IRS launched civil and criminal investigations on ERC claims. Tax fraud is
Investigations often defined as intentional wrongdoing, on the part of a taxpayer, with
the specific purpose of evading a tax known or believed to be owing,
according to IRS. 3 There is no time limit for IRS to assess a fraudulent tax
return with intent to avoid tax.
Office of Promoter The Office of Promoter Investigations, established in 2021, leads and
Investigations directs activities that support IRS efforts to detect and deter abusive tax
promotions and abusive return preparers. The Office of Promoter
Investigations investigates civil fraud and makes referrals to the
Department of Justice and IRS’s Criminal Investigations (CI) unit. The
Office of Promoter Investigations received over 350 leads, resulting in
3Civil fraud results in a remedial action taken by the government, such as assessing the
correct tax and imposing civil penalties as an addition to tax, as well as retrieving
transferred assets. Civil penalties are assessed and collected administratively as part of
the unpaid balance of assessment. Criminal fraud results in a punitive action with
penalties consisting of fines and/or imprisonment. Internal Revenue Manual section
25.1.1.
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Appendix IV: Internal Revenue Service Efforts
to Address Ineligible Employee Retention
Credit Claims on Amended Returns
over 220 promoter reviews, in fiscal years 2021 through 2024, according
to IRS data.
Office of Fraud Enforcement The Office of Fraud Enforcement provides oversight and direction on
fraud policy, assists in identifying fraud indicators and compliance staff
assist in pursuing civil fraud penalty assertions and other actions to
improve compliance. The Office of Fraud Enforcement researched ERC-
related leads and identified $1.4 billion of potential ERC fraud in fiscal
years 2020 through 2024, according to IRS data.
CI IRS staff encountering possible fraud on an ERC return can make
referrals to IRS’s CI unit. As of February 2025, CI initiated 545
investigations associated with over $5.6 billion in ERC fraud, according to
IRS data. Of these, 75 resulted in federal charges, and 38 of those
resulted in convictions, while some cases are still being investigated.
Starting in 2024, CI began regularly monitoring social media for ERC-
related schemes, according to IRS officials. With the acquisition of new
tools, social media monitoring is a recent effort.
Page 72 GAO-26-107456 COVID-19 Relief
Appendix V: Comments from the Internal
Appendix V: Comments from the Internal
Revenue Service
Revenue Service
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Appendix V: Comments from the Internal
Revenue Service
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Appendix V: Comments from the Internal
Revenue Service
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Appendix V: Comments from the Internal
Revenue Service
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Appendix V: Comments from the Internal
Revenue Service
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Appendix VI: GAO Contacts and
Appendix VI: GAO Contacts and
Acknowledgments
Acknowledgments
Jessica Lucas-Judy, lucasjudyj@gao.gov
GAO Contact
In addition to the contacts named above, Brian K. James (Assistant
Staff Director), Lindsay Swenson (Analyst-in-Charge), T. Jackson Autry,
Acknowledgments Michael Bechetti, Jacqueline Chapin, David Dornisch, William (Lee)
Evans, Gabrielle Fagan, Daniel Flavin, Sarah Garcia, Mary Ann Hardy,
Mark Kehoe, Krista Loose, Daniel Mahoney, Sheila R. McCoy, Daniel
Newman, Andrew Pauline, Paige Smith, Amanda Stogsdill, Brennan
Williams, and Mercedes Wilson-Barthes made key contributions to this
report.
Page 78 GAO-26-107456 COVID-19 Relief
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