GAO-22-104280, COVID-19: IRS Implemented Tax Relief for Employers Quickly, but Could Strengthen Its Compliance Efforts

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Document type: GAO-22-104280, COVID-19: IRS Implemented Tax Relief for Employers Quickly, but Could Strengthen Its Compliance Efforts
Case: GAO-22-104280, COVID-19: IRS Implemented Tax Relief for Employers Quickly, but Could Strengthen Its Compliance Efforts

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United States Government Accountability Office
Report to Congressional Committees

COVID-19
May 2022

IRS Implemented Tax
Relief for Employers
Quickly, but Could
Strengthen Its
Compliance Efforts

GAO-22-104280
May 2022

COVID-19
IRS Implemented Tax Relief for Employers Quickly,
but Could Strengthen Its Compliance Efforts
Highlights of GAO-22-104280, a report to
congressional committees

Why GAO Did This Study What GAO Found
The COVID-19 pandemic resulted in Starting in March 2020, Congress passed several laws, including the CARES
significant challenges to the U.S. Act, to provide employers with tax relief in response to the economic burden
economy, leading to business brought on by the COVID-19 pandemic. Provisions in these laws established the
closures. The employment tax relief paid sick and family leave credits (leave credits), the Employee Retention Credit
measures Congress passed to help (ERC), and payroll tax deferrals. IRS implemented these provisions while facing
businesses affected by the pandemic delays caused by facility closures and other challenges. As new laws were
were estimated to result in about enacted, IRS continued to revise employment tax returns and guidance.
$237.8 billion in foregone revenue for
fiscal years 2021-2031. Leave credits and ERCs for 2020 totaled about $20.7 billion. Payroll tax deferrals
totaled about $123.6 billion, as shown in the table. In addition, preliminary data
The CARES Act includes a provision
indicate 2021 usage of leave credits and ERCs likely exceed 2020 usage.
for GAO to report on the federal
government’s response to the COVID- Data on Leave Credits, Employee Retention Credits, and Payroll Tax Deferrals, 2020
19 pandemic. This report describes Provision Number of employers using Dollars in billions
IRS’s efforts in implementing the Leave credits 1,509,611 9.8
employment tax provisions. The report Employee Retention Credits 119,834 10.9
also evaluates IRS’s plans and actions Payroll tax deferrals 1,026,282 123.6
to identify compliance risks for the
provisions. Source: GAO analysis of Internal Revenue Service data. | GAO-22-104280

Note: The tax credit dollar figures are as reported by taxpayers and are subject to taxpayer reporting
GAO reviewed federal laws and error. Data are from employment and income tax returns, as of December 2021 and January 2022.
compared IRS’s compliance plans and Several of the top industry sectors claiming leave credits and ERCs were sectors
procedures with selected project
most affected by the pandemic that GAO identified in previous work. For
management practices and with tax
example, Manufacturing claimed the second highest amounts of leave credit
credit eligibility requirements. GAO
analyzed IRS data from employment
dollars (about 13 percent) and the Accommodation and Food Services sector
tax returns for 2020, including data on claimed the highest amount of ERC dollars (about 15 percent).
industry sector. GAO also interviewed IRS took some steps to identify and plan for compliance risks associated with the
IRS employees and officials. leave credits and the ERC. As IRS continues to plan for examinations of both
What GAO Recommends credits—which expired in 2021 but will be subject to examination for several
years after filing—GAO found IRS could strengthen these efforts by expanding its
GAO is making five recommendations use of selected project management practices. For example, IRS developed
including that IRS develop a objectives but the objectives did not evolve to reflect statutory changes made
compliance plan consistent with project after the CARES Act, are not measurable, and do not include criteria to measure
management principles, document success. A comprehensive and cohesive compliance plan would help guide IRS
compliance processes for adjusted efforts to ensure that it adequately identifies and addresses compliance risks.
returns and tax credits using restricted
wages, and identify ineligible entities. IRS began creating new processes to research and address compliance risks
IRS agreed with two of the associated with tax credits claimed on adjusted returns and employers who
recommendations and disagreed with claimed multiple credits with wages that are restricted from use for more than
three. IRS said its current processes one type of credit. However, IRS has not documented how it developed those
are sufficient. GAO maintains that processes or how it would implement them in practice. Documentation increases
these recommendations remain transparency and can inform future compliance efforts.
warranted.
In preliminary data, GAO found 337 filings, totaling $100 million, from employers
that were established in April 2020 or later, but then stopped filing employment
tax returns. IRS screening filters flagged more than 65 percent of these filers for
View GAO-22-104280. For more information, review. However, those controls may still overlook ineligible entities because they
contact Jessica Lucas-Judy, (202) 512-6806, do not consider certain factors, such as refund amounts and employer
lucasjudyj@gao.gov or Cheryl E. Clark, (202)
512-3406, clarkce@gao.gov establishment dates.
United States Government Accountability Office
Contents

Letter 1
Background 4
IRS Rapidly Implemented Employment Tax Provisions and
Worked to Address Return Processing Challenges 9
Employers Claimed $20.7 Billion in Tax Credits and Deferred
$123.6 Billion in Payroll Taxes for 2020, but Use Varied 13
IRS Could Improve Its Approach to Mitigating Taxpayer
Compliance Risks 25
Conclusions 36
Recommendations for Executive Action 36
Agency Comments 37

Appendix I Objectives, Scope, and Methodology 43

Appendix II COVID-19-Related Tax Credits and Payroll Tax Deferrals by Industry
Sector 51

Appendix III COVID-19-Related Tax Credits and Payroll Tax Deferral, Additional
Data for Selected Sectors 55

Appendix IV Comments from the Internal Revenue Service 63

Appendix V GAO Contact and Acknowledgments 68

Tables
Table 1: Selected IRS Forms for Employment Tax Filing 5
Table 2: Selected COVID-19-Related Employer Tax Provisions 6
Table 3: Number and Dollars of Sick and Family Leave Credits
Claimed, 2020 13
Table 4: Top Average Sick and Family Leave Credit Amounts per
Employer, by Sector, 2020 17
Table 5: Number and Dollars of Employee Retention Credits
Claimed, 2020 17
Table 6: Top Average Employee Retention Credit Amounts per
Employer, by Sector, 2020 20
Table 7: Number and Amount of Payroll Tax Deferrals for 2020 21
Table 8: Top Average Payroll Tax Deferral Amounts per
Employer, by Sector, 2020 23
Table 9: Tax Returns Analyzed 44
Table 10: Population, Sample Size, and Outliers Selected for
Review 49
Table 11: Paid Sick and Family Leave Credits, by Industry Sector,
2020 51
Table 12: Employee Retention Credits, by Industry Sector, 2020 52
Table 13: Payroll Tax Deferrals, by Industry Sector, 2020 53

Figures
Figure 1: Sick and Family Leave Credit Dollars Claimed by Top
Five and “Hardest-Hit” Sectors, 2020 16
Figure 2: Employee Retention Credits by Top Five Dollars
Claimed and “Hardest-Hit” Sectors, 2020 19
Figure 3: Payroll Tax Deferrals Used by Top Five Dollars Claimed
and “Hardest-Hit” Sectors, 2020 22
Figure 4: Accommodation and Food Service Sector Employee
Retention Credits, Leave Credits and Payroll Tax
Deferrals, 2020 55
Figure 5: Administrative and Support and Waste Management and
Remediation Services Sector Employee Retention
Credits, Leave Credits and Payroll Tax Deferrals, 2020 56
Figure 6: Arts, Entertainment, and Recreation Sector Employee
Retention Credits, Leave Credits and Payroll Tax
Deferrals, 2020 57
Figure 7: Construction Sector Employee Retention Credits, Leave
Credits, and Payroll Tax Deferrals, 2020 57
Figure 8: Educational Services Sector Employee Retention
Credits, Leave Credits, and Payroll Tax Deferrals, 2020 58
Figure 9: Health Care and Social Assistance Sector Employee
Retention Credits, Leave Credits, and Payroll Tax
Deferrals, 2020 59
Figure 10: Manufacturing Sector Employee Retention Credits,
Leave Credits, and Payroll Tax Deferrals, 2020 59
Figure 11: Professional, Scientific, and Technical Services Sector
Employee Retention Credits, Leave Credits, and Payroll
Tax Deferrals, 2020 60
Figure 12: Retail Trade Employee Retention Credits, Leave
Credits, and Payroll Tax Deferrals, 2020 61
Figure 13: Transportation and Warehousing Sector Employee
Retention Credits, Leave Credits, and Payroll Tax
Deferrals, 2020 61

Abbreviations

ARPA American Rescue Plan Act of 2021
CAA, 2021 Consolidated Appropriations Act, 2021
EIN Employer Identification Number
ERC Employee Retention Credit
FFCRA Families First Coronavirus Response Act
IIJA Infrastructure Investment and Jobs Act
IRS Internal Revenue Service
Leave credits Sick and Family Leave Credits
NAICS North American Industry Classification System
PMBOK® Guide A Guide to the Project Management Body of
Knowledge
PPP Paycheck Protection Program
SBA Small Business Administration
SB/SE Small Business/Self-Employed division

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Letter

441 G St. N.W.
Washington, DC 20548

May 17, 2022

Congressional Committees

Congress has provided an estimated $4.6 trillion in emergency assistance
and health care response for individuals, families, and businesses
affected by COVID-19. 1 Stay-at-home orders, social distancing
requirements, and reduced consumer demand early in the pandemic
caused both temporary and permanent business closures, particularly
among small businesses.

The laws providing this assistance included several tax provisions to help
employers support and retain affected employees. This included the
Employee Retention Credit (ERC), paid sick and family leave credits
(leave credits), and payroll tax deferrals. The Joint Committee on
Taxation estimated that these COVID-19-related tax provisions will result
in about $237.8 billion in foregone revenue for the federal government for
fiscal years 2021-2031. 2 The Internal Revenue Service (IRS) is
responsible for implementing these tax provisions. Implementation of new
initiatives has been a challenge for IRS as we have reported, including in
our 2021 High-Risk Report. 3

The 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. As part of our periodic government-wide
1The estimated $4.6 trillion is from the total budgetary resources reported to the
Department of the Treasury’s Governmentwide Treasury Account Symbol Adjusted Trial
Balance System, as of November 20, 2021. The resources are for six COVID-19 relief
laws providing comprehensive relief across federal agencies and programs. These six
laws are the American Rescue Plan Act of 2021 (ARPA), Pub. L. No. 117-2, 135 Stat. 4;
Consolidated Appropriations Act (CAA), 2021, Pub. L. No. 116-260, 134 Stat. 1182
(2020); Paycheck Protection Program and Health Care Enhancement Act, Pub. L. No.
116-139, 134 Stat. 620 (2020); CARES Act, Pub. L. No. 116-136, 134 Stat. 281 (2020);
Families First Coronavirus Response Act (FFCRA), Pub. L. No. 116-127, 134 Stat. 178
(2020); and the Coronavirus Preparedness and Response Supplemental Appropriations
Act, 2020, Pub. L. No. 116-123, 134 Stat. 146.
2This estimate includes FFCRA, the CARES Act, CAA, 2021, ARPA, and the
Infrastructure, Investment and Jobs Act. The $237.8 billion estimate of foregone revenue
cannot be compared with the $4.6 billion estimated total budgetary resources.
3GAO, High-Risk Series: Dedicated Leadership Needed to Address Limited Progress in
Most High-Risk Areas, GAO-21-119SP (Washington D.C.: Mar. 2, 2021). Enforcement of
tax laws has appeared on our High-Risk List since 1990.

Page 1 GAO-22-104280 COVID 19
reports, we previously discussed some aspects of IRS’s implementation
of these tax provisions. Specifically, we monitored IRS’s release of
guidance and tax forms, processing of tax credit refunds, and work with
other federal agencies implementing related programs. 4

In this report, we (1) describe IRS’s implementation of the COVID-19-
related employer tax provisions; (2) describe the characteristics of the
employers leveraging these provisions and selected perspectives on their
usefulness; and (3) evaluate IRS’s plans and actions to identify and
address taxpayer compliance risks.

To describe IRS’s implementation of the leave credits, ERC, and payroll
tax deferrals (collectively, “employer tax provisions”), we reviewed federal
laws and our prior work. 5 We also reviewed agency actions to implement
our prior recommendations. We monitored IRS’s release of guidance and
communications, including frequently asked questions and notices, and
tips for tax preparers. We also reviewed revisions to employment tax
forms and instructions. We analyzed IRS data, as of September 30, 2021,
on Form 7200, Advance Payment of Employer Credits Due to COVID-19,
processing and rejections. We also reviewed IRS internal guidance
describing the implementation methods and procedures for the tax
provisions. We interviewed representatives from three professional
groups (two payroll and one tax group) to obtain feedback on their
experiences with IRS’s implementation of the employer tax provisions.
We selected these groups because of their membership size and their
members’ role with filing employment tax returns. We also interviewed
IRS officials to discuss implementation processes and statutory changes.

To describe the characteristics of employers leveraging the employer tax
provisions, we analyzed IRS data from employment and income tax
returns processed and in IRS’s data systems. These data are in different
systems updated at various times from November 2021 through January
2022. We also used IRS data on businesses, such as filing requirements
and taxpayer reported data on sectors, based on the North American
Industry Classification System. We assessed the reliability of IRS data by
reviewing relevant documentation, interviewing knowledgeable IRS

4For example, GAO, COVID-19: Continued Attention Needed to Enhance Federal
Preparedness, Response, Service Delivery, and Program Integrity, GAO-21-551
(Washington, D.C.: July 10, 2021); and COVID-19: Sustained Federal Action Is Crucial as
Pandemic Enters Its Second Year, GAO-21-387 (Washington, D.C.: Mar. 31, 2021).
5GAO-21-387.

Page 2 GAO-22-104280 COVID 19
officials, and performing electronic testing. We determined that the data
used in our analysis were sufficiently reliable for the purpose of describing
employers using the tax credits and payroll tax deferrals. We obtained
payroll tax deferral repayment data from IRS officials as of December 31,
2021.

To discuss experiences filing for the tax credits and the usefulness of the
credits and deferrals, we interviewed employees and members from one
tax preparation and two payroll professional groups. We selected these
groups based on their size and the role of their professionals in filing
employment tax returns. Additionally we interviewed representatives from
11 business groups and members from one other business group. We
selected them because of the size and demographics of businesses they
represent. 6 These statements are not representative or generalizable to
all professionals or groups.

To evaluate IRS’s plans and actions to identify and address taxpayer
compliance risks, we analyzed various agency documents, such as
compliance plans and procedures. We compared these documents with
eligibility requirements for the tax credits and selected project
management practices. 7 We also used IRS data, mentioned previously, to
identify and analyze several areas of potential taxpayer compliance risk.
Based on IRS documentation, we selected processes from different IRS
divisions related to reviewing the tax credits to use as the basis of
interviewing employees about their work. When necessary, we
considered office locations and randomly selected employees to
participate in interviews. We then used these interviews to help
understand IRS’s processes and to identify challenges.

To test controls over the ERC, leave credits, and related advance credits,
we selected three generalizable random attribute samples of credits that

6For example, we met with groups that represent small businesses and self-employed
individuals generally, and groups that represent women, Black, Hispanic, Asian, and
Native American small business owners.
7Project management practices are 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
Project Management Institute is a not-for-profit association that provides global standards
for, among other things, project and program management. We selected the practices
based on their relevance to IRS’s implementation of the laws.

Page 3 GAO-22-104280 COVID 19
IRS processed between April 16, 2020, and February 27, 2021. 8 For each
sampled transaction, we reviewed IRS documentation such as account
information and tax returns to determine whether the tax credit
disbursements were accurate.

For all of our objectives, we interviewed IRS officials to discuss the
implementation and compliance planning related to the COVID-19-related
provisions.

We conducted this performance audit from April 2020 to May 2022 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.

Background
Overview of Employment For federal tax purposes, employers generally are required to withhold
Taxes and remit two types of taxes from their employees’ salaries: federal
income tax and Federal Insurance Contribution Act taxes, also referred to
as “payroll taxes.” 9 The payroll taxes include Old-Age, Survivors and
Disability Insurance (Social Security) and hospital insurance (Medicare)
taxes. 10 For 2021, Social Security taxes were 12.4 percent of taxable
wages, and the Medicare tax rate was 2.9 percent. Half of each is to be
withheld from employee pay (referred to as “employee share of payroll
tax”) and half of each is paid by the employer (referred to as the
“employer share of payroll tax”). 11 Self-employed individuals generally pay
the Social Security tax at a 12.4 percent rate and the Medicare tax at a

8Certain employers could file for an advance payment of their leave credits or ERCs
between employment tax return filings. Each sample was planned with a tolerable error of
5 percent and an expected error of 1 percent at a 95 percent confidence level.
926 U.S.C. §§ 3402, 3102. 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.
1026 U.S.C. §§ 3101, 3111.

11Social Security taxes are levied on earnings up to a maximum level set each year.
Earnings beyond the threshold are not counted when calculating benefits. In 2020, the cap
on taxable earnings was $137,700. The cap increased to $142,800 for 2021.

Page 4 GAO-22-104280 COVID 19
2.9 percent rate. Employers must deposit taxes daily, semiweekly or
monthly, depending on their reported tax liability.

In general, employers must file their employment taxes and report taxable
wages and other information. Most employers use Form 941, Employer’s
Quarterly Federal Tax Return, while employers meeting certain criteria
may file annually on other forms. In fiscal year 2020, employers filed
about 28 million employment tax returns, according to IRS data.
Employers use employment tax returns to claim employer tax credits or to
report payroll tax deferrals (see table 1). 12

Table 1: Selected IRS Forms for Employment Tax Filing

IRS form number Name Purpose
941 Employer’s Quarterly Federal Tax Return Report federal income tax, Social Security tax and Medicare tax
paid and withheld from employee wages.
943 Employer’s Annual Federal Tax Return for Report federal income tax, Social Security tax and Medicare tax
Agricultural Employees paid and withheld from one or more farmworkers.
944 Employer’s Annual Federal Tax Return Report federal income tax, Social Security tax and Medicare tax
paid and withheld from employee wages at small employers.a
941-X, 943-X and Adjusted Employment Tax Returns Report correction of errors on previously filed employment tax
944-X returns, including filing retroactive tax credit claims.
7200 Advance Payment of Employer Credits Request an advance payment of the COVID-19-related employer
Due to COVID-19 tax credits if a credit exceeds reduced employment tax deposits.b
This form is not a tax return and only certain employers may use it.
Source: GAO analysis of IRS forms and instructions. | GAO-22-104280
a
Small employers are those whose annual liability for Social Security, Medicare, and withheld federal
income taxes is $1,000 or less.
b
Advance payments of the Employee Retention Credit for 2021 are limited to small eligible employers
that averaged 500 or fewer full-time employees in 2019. For employers that were not in existence in
2019, advance payments are limited to small employers that averaged 500 or fewer full-time
employees in 2020.

Employer Tax Relief The CARES Act, Families First Coronavirus Response Act (FFCRA), and
Provisions in the CARES other statutes created and modified COVID-19 employer tax relief
provisions, mainly the ERC, leave credits, and the deferrals of tax
Act Relief Package and
payments for both the employee and employer’s share of payroll tax. The
Other Legislation Consolidated Appropriations Act, 2021 (CAA, 2021), and the American

12Self-employed individuals with employees claim paid sick and family leave equivalent
tax credits on their income tax returns. With respect to their employees, self-employed
individuals claim the leave credits on the relevant employment tax returns. Certain
employers are ineligible for advance credits.

Page 5 GAO-22-104280 COVID 19
Rescue Plan Act of 2021 (ARPA) amended or modified key aspects of the
implementation of these provisions (see table 2).

Table 2: Selected COVID-19-Related Employer Tax Provisions

Covered dates for
Employer provision Purpose Authorities eligible wages
Paid sick and family leave To help certain small employers and Families First Coronavirus Periods of leave between
credits certain government employers offset Response Act (FFCRA) and April 1, 2020 and March 31,
the cost of employee leave related to CARES Act for 2020; 2021 (under FFCRA as
COVID-19, the employer can receive Consolidated Appropriations amended and extended by
refundable credits for up to certain Act, 2021 (CAA, 2021); and the the CAA, 2021); periods of
amounts per employee for health American Rescue Plan Act of leave between April 1, 2021,
needs, or to care for a family member. 2021 (ARPA) for 2021 and September 30, 2021
(under ARPA)
Employee Retention Credit To encourage employers to keep CARES Act for 2020; CAA, March 13, 2020, through
employees on their payroll. This 2021; ARPA; and the September 30, 2021 (for
refundable credit is for eligible Infrastructure and Investment in most employers), and July 1,
employers whose trade or business Jobs Act (IIJA) for 2021a 2021, through December 31,
was suspended by a government order 2021 (recovery startup
due to COVID-19 or who were businesses)a
financially affected during calendar
quarters in 2020 and 2021.
Deferred payroll tax To allow employers to keep additional CARES Act March 27, 2020, through
payments for employer cash on hand. Employers could defer December 31, 2020
share of Social Security the deposit and payment of the 6.2
percent Social Security tax on wages
and compensation.
Deferred payroll tax To allow certain employees to keep Presidential Memorandum September 1, 2020, through
payments for employee additional cash on hand. Employers August 2020 December 31, 2020
share of Social Security could defer the withholding, deposit
and payment of the employee’s 6.2
percent Social Security tax on wages
and compensation paid. Only
employees with wages under $4,000 in
a biweekly period could defer.
Source: GAO analysis of authorities. | GAO-22-104280.

Notes: We analyzed the following provisions: FFCRA; the CARES Act; CAA, 2021; ARPA; and IIJA,
and Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster. Pub. L. No. 116-
127, §§ 7001–7004, 134 Stat. 178, 210–219 (2020); Pub. L. No. 116-136, §§ 2301, 2302, 3606, 134
Stat. 281, 347–352, 411–412 (2020); Pub. L. No. 116-260, div. N, § 286, div. EE, §§ 206, 207, 134
Stat. 1182, 1989, 3059–3064 (2020); Pub. L. No. 117-2, §§ 9641, 9651, 135 Stat. 4, 161–172, 176–
182 (2021); Pub. L. No. 117-58, § 80604, 135 Stat. 429, 1341 (2021); 85 Fed. Reg. 49587 (Aug. 13,
2020).
a
IIJA retroactively terminated the ERC for wages paid after September 30, 2021, for employers other
than recovery startup businesses. Pub. L. No. 117-58, § 80604, 135 Stat. 429, 1341 (2021). A
recovery startup business is an employer (1) that began carrying on any trade or business after
February 15, 2020; and (2) for which the average annual gross receipts did not exceed $1 million
over a certain 3-taxable-year period. Pub. L. No. 117–2, § 9651(a), 135 Stat. at 179; as amended by
Pub. L. No. 117–58, § 80604(a), 135 Stat. at 1341; codified at 26 U.S.C. § 3134(c)(5).

Page 6 GAO-22-104280 COVID 19
Although they have similar purposes to provide tax relief, the credits and
deferrals have different eligibility criteria and other requirements.

Leave Credits. Under FFCRA, businesses and tax-exempt organizations
with fewer than 500 employees were eligible for refundable tax credits for
sick and family leave. 13 Qualifying paid sick leave includes leave taken to
comply with quarantine or isolation orders (or to care for someone under
orders), to seek a COVID-19 diagnosis, or to provide child care under
certain circumstances. 14 Qualifying paid family leave includes childcare
when school or other care is unavailable due to COVID-19. Certain self-
employed persons in similar circumstances are allowed equivalent
credits. Among other things, ARPA expanded eligibility to state and local
governments, and expanded qualifying paid leave definitions to include
COVID-19 vaccinations or time spent waiting for test results. 15

Employee Retention Credit. Under the CARES Act as amended by the
CAA, 2021, and ARPA, eligible employers of any size—including tax-
exempt entities, eligible governmental entities, and self-employed
individuals with employees—can claim the ERC. 16 The credit amount is
based on qualified wages paid to employees, including certain health care
expenses. 17 Qualified leave wages used to claim the leave credits cannot

13Pub. L. No. 116-127, §§ 7001–7004, 134 Stat. 178, 210–219 (2020). The CARES Act
provided for advance refunds of the credits and CAA, 2021, extended the credits to apply
to wages paid before March 31, 2021. Pub. L. No. 116-136, § 3606, 134 Stat. at 411–412;
Pub. L. No. 116-260, § 286, 134 Stat. at 1989 Full- and part-time employees are counted.
Both credits have maximum payouts.
14The tax credits under FFCRA, as amended and extended by the CAA, 2021, for leave
taken from April 1, 2020, through March 31, 2021, are equal to qualified leave wages paid
to employees, plus the employer share of Medicare taxes paid with respect to qualified
wages and allocable health plan expenses.
15Pub. L. No. 117-2, § 9641, 135 Stat. at 161–172, APRA added the credits to the Internal
Revenue Code. 26 U.S.C. §§ 3131–3133.
16Pub. L. No. 116-136, § 2301, 134 Stat. at 347–351; Pub. L. No. 116-260, div. EE, §§
206, 207 134 Stat. at 3059–3065; Pub. L. No. 117-2, § 9651, 135 Stat. at 176–182.
Eligible government entities include tribal governments, tribal entities, and state- or locally-
run colleges, universities, and organizations providing medical or hospital care.
17For eligible large employers (that averaged more than 100 employees during 2019),
qualified wages are those paid to an employee not providing services during periods of full
or partial suspension of operation due to a governmental order or a significant decline in
gross receipts. For eligible small employers (that averaged 100 or fewer employees during
2019), qualified wages are wages paid to an employee during the same periods.

Page 7 GAO-22-104280 COVID 19
be used as qualified wages to claim the ERC. 18 In 2020, an employer was
considered eligible to claim the ERC when it experienced either: (1) full or
partial suspension of operations due to governmental orders during any
quarter, or (2) a significant decline in gross receipts, more than 50
percent for the same quarter in 2019. 19

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 received a forgiven Paycheck
Protection Program (PPP) loan, who had been previously ineligible. 20
ARPA and the Infrastructure Investment and Jobs Act (IIJA) made
additional amendments. 21

Deferred Payroll Tax Payments for Employer and Employee Share of
Social Security. The CARES Act granted all employers the option to
defer deposits and payments of the employer share of the Social Security
portion of the Federal Insurance Contributions Act tax and the employer's
share of the Social Security portion of the Railroad Retirement Tax Act
tax. These would otherwise be required to make during the period
beginning March 27 through December 31, 2020. 22 Self-employed
individuals could defer half of their Social Security taxes imposed on net
earnings from self-employment during the same period. Deferred deposits

18There are other wages for which an employer may not claim the ERC, as discussed
later in this report.
19Employers are no longer eligible in the first quarter after the one in which gross receipts
are more than 80 percent of the same quarter in the previous calendar year.
20Pub. L. No. 116-260, §§ 206, 207, 134 Stat. 3059–3064. PPP loans are made by
lenders to small businesses, guaranteed 100 percent by the Small Business
Administration, low interest, and fully forgivable if certain conditions are met. The eligibility
change for PPP borrowers was retroactive to 2020. Thus, employers could file adjusted
employment tax returns in 2021 to claim ERCs for qualifying wages paid in 2020.
21ARPA granted eligibility to “recovery startup businesses” who otherwise would not meet
eligibility criteria to claim the credit, among other changes. Pub. L. No. 117-2, § 9651, 135
Stat. at 176–182. IIJA retroactively terminated the ERC for wages paid after September
30, 2021, for employers other than recovery startup businesses. Pub. L. No. 117-58, §
80604, 135 Stat. 429, 1341 (2021).
22Pub. L. No. 116-136, § 2302, 134 Stat. at 351–352, as amended by the Paycheck
Protection Program Flexibility Act, Pub. L. No. 116-142, § 4, 134 Stat. 641, 643 (2020). To
be considered timely, deferred payments of 50 percent of tax are to be made by
December 31, 2021, with the remainder due December 31, 2022. The employer share of
Social Security tax is 6.2 percent of taxable earnings up to the Social Security wage base
cap on taxable income.

Page 8 GAO-22-104280 COVID 19
and payments were to be reported on employment tax returns or income
tax returns for self-employed individuals.

On August 8, 2020, a Presidential Memorandum directed the Secretary of
the Treasury to allow the deferral of withholding, deposit, and payment of
the employee share of certain employment taxes imposed on wages or
compensation paid from September 1, 2020, through December 31,
2020. 23 This applied if an employee’s wages or compensation are
generally less than $4,000 during any biweekly pay period on a pretax
basis, or the equivalent amount with respect to other pay cycles. The
CAA, 2021, and Notice 2021-11 extended the time period during which
employers may withhold and pay the deferred employment taxes until
December 31, 2021. 24

IRS Rapidly
Implemented
Employment Tax
Provisions and
Worked to Address
Return Processing
Challenges
IRS Developed and IRS worked quickly to implement the new laws that changed aspects of
Revised Guidance and federal employment tax to provide relief to employers. IRS created a team
led by the Small Business/Self-Employed division to develop and issue
Tax Forms under Tight
guidance, conduct communications and outreach, revise forms and
Time Frames instructions, and implement system changes. The team included
members from examination and collection, and other divisions, such as
Counsel, Communications and Liaison and Research, Analysis and
Statistics. The team also led coordination and development in areas such
as information technology (i.e., establishing an electronic fax line to

2385 Fed. Reg. 49587 (Aug. 13, 2020).

24Pub. L. No. 116-260, div. N, § 274, 134 Stat. at 1978; IRS Notice 2021-11, 2021-6 I.R.B
827 (Feb. 8, 2021). The guidance directs employers to ratably withhold and pay the
deferred taxes, meaning, in general, equally apportioned across the period.

Page 9 GAO-22-104280 COVID 19
receive Form 7200), communication with taxpayers, and personnel
management (i.e., training staff on the new provisions).

IRS began releasing guidance and revising forms just days after FFCRA
was enacted on March 18, 2020, and the CARES Act on March 27, 2020.
The forms included Form 7200, the Advance Payment of Employer
Credits Due to COVID-19, and its instructions released on April 1, 2020.
This form allowed employers to request an advance payment of the tax
credits rather than waiting to claim them on their employment tax return.

As new statutes modified the tax credits, IRS continued to revise and
update guidance—that included, but was not limited to issuing multiple
notices and frequently asked questions—and update the public via its
website. For example, in August 2021, IRS released guidance on the
ERC for the third and fourth quarters of 2021. 25 IRS also revised Form
941 and its instructions four times—twice in 2020 and twice in 2021—to
reflect legislative and other changes. On December 6, 2021, IRS issued
guidance regarding the termination of the ERC for employers other than
recovery startup businesses that are still eligible for the credit for the
fourth quarter of 2021. 26 Employers other than recovery startup
businesses that received advance payments for fourth quarter wages of
2021 are instructed to repay the amounts by the due dates of their
employment tax returns.

Despite Disruptions, IRS
Completed 2020
Employment Tax Return
Processing and Resolved
Some Tax Credit
Implementation Issues
The COVID-19 Pandemic According to IRS officials, the agency completed processing of 2020
Disrupted Returns Processing employment tax returns (Forms 941, 943, and 944) on December 14,
2021. The officials said processing took longer than previous years
because of systemic, procedural, and operational changes IRS made in

25IRS Notice 2021-49, 2021-34 I.R.B. 316 (Aug. 23, 2021), available online at:
https://www.irs.gov/irb/2021-34_IRB, accessed January 28, 2022.
26IRS Notice 2021-65, 2021-51 I.R.B. 880 (Dec. 20, 2021), available online at:
https://www.irs.gov/irb/2021-51_IRB, accessed January 28, 2022.

Page 10 GAO-22-104280 COVID 19
response to the COVID-19 pandemic. 27 For example, IRS closed certain
processing facilities and made staffing changes, such as reassigning
personnel from other divisions and training of personnel, according to IRS
officials. As a result, IRS was delayed in opening and processing paper
returns and employers received refunds later than they otherwise would
have. Over time, IRS began reopening facilities at partial capacity to
accommodate social distancing measures, according to IRS officials. To
mitigate the backlog, IRS rerouted returns and taxpayer correspondence
to locations where more employees were available, according to
information on the IRS website.

IRS also encountered other challenges in processing adjusted
employment tax returns. 28 For example, IRS received 127 percent more
Forms 941-X, Adjusted Employer’s Quarterly Federal Tax Return or
Claim for Refund, in calendar year 2021 than in 2019. 29 The increase was
due, in part, to ERC claimants who were PPP borrowers with forgiven
loans that became retroactively eligible for the credit, according to IRS
officials. 30 These returns can only be filed on paper. Thus, processing
them requires more manual steps than processing electronic forms,

27In March and July 2021 and April 2022, we reported on how COVID-19 affected IRS’s
operations during the filing season. GAO, Tax Filing: 2021 Performance Underscores
Need for IRS to Address Persistent Challenges, GAO-22-104938 (Washington, D.C.: Apr
11, 2022); COVID-19: Continued Attention Needed to Enhance Federal Preparedness,
Response, Service Delivery, and Program Integrity, GAO-21-551 (Washington, D.C.: July
10, 2021); and Tax Filing: Actions Needed to Address Processing Delays and Risks to the
2021 Filing Season, GAO-21-251 (Washington, D.C.: Mar. 1 2021).
28An employer may submit an adjusted return to correct an error, or claim a previously
unclaimed tax credit.
29We did not compare with 2020 because of pandemic-related disruptions. Because of
adjusted returns resulting from CAA, 2021, changes would not have been received in
2020. The 2021 data are as of November 22, 2021, and are incomplete with receipts still
being entered into the data system.
30In the draft for our July 2021 report enclosure, we recommended that IRS and the Small
Business Administration (SBA) work together to disseminate information to PPP loan
forgiveness applicants on the tax implications of payroll cost allocations when they apply
for loan forgiveness. In response, in June 2021, SBA published guidance on its website
that included an explanation of the potential tax implications associated with how an
employer decides to allocate eligible payroll costs on a loan forgiveness application. It also
linked to IRS’s detailed guidance on the ERC. As a result of the guidance, we did not
make a recommendation in our final report. The guidance SBA issued could help
employers maximize the benefits of both the PPP and ERC. See GAO-21-551, enclosure
on “Employer Tax Relief.”

Page 11 GAO-22-104280 COVID 19
making it resource intensive. As of January 19, 2022, IRS had
approximately 440,000 unprocessed Forms 941-X.

IRS Was Delayed in To quickly receive and process advance credit claims, IRS developed an
Processing Forms 7200 and electronic fax system for receiving Form 7200 filings for the advance
More Than Half Were Rejected payment of employer credits. Incoming forms were stored electronically
for review, which helped IRS bypass mail-related delays. However, as we
previously reported, IRS still experienced significant delays in processing
and paying credit refunds. 31

In July 2021, we reported these forms had a rejection rate of about 60
percent (based on data through May 2021). As of September 30, 2021,
IRS had designated almost 72 percent (63,562 of 87,915) of Form 7200
submissions it received as “rejected,” according to IRS officials. IRS most
often rejected forms because the filer provided an unauthorized signature
or filed a Form 7200 after submitting a Form 941 for the same quarter or
after the due date of the Form 941 for the quarter.

IRS received a higher volume of Form 7200 filings after statutory changes
in the CAA, 2021, made PPP borrowers eligible for employer credits. IRS
officials said that they received a higher volume of Forms 7200 from
January to March 2021, compared with November and December 2020.
This delayed processing. IRS officials said the PPP borrowers who
submitted Forms 7200 in January 2021 sometimes used the wrong form,
which resulted in rejections. These filers should have used a Form 941-X
instead because the original return for the quarter in question was already
filed or processed, or the deadline to file Form 7200 for the quarter had
already passed.

Six of 10 payroll and tax professionals we spoke with in April and May
2021 said the employers for whom they file employment tax returns were
frustrated with the Form 7200 response, and in some cases were using
Form 941 instead because the Form 7200 filings were not resulting in
payments during the expected 7-week time frame.

To reduce rejection rates, IRS issued a “tax tip” in April 2020 outlining
common errors on Form 7200 and emailed reminders to payroll
professionals in June 2021. Common errors that taxpayers should watch
for included missing or inaccurate employer identification numbers—

31GAO-21-551.

Page 12 GAO-22-104280 COVID 19
indicating more than one calendar quarter—and math errors. Also, IRS
officials said that as of September 30, 2021, IRS had mailed 56,118
letters to employers whose Form 7200 claims were rejected. The last
remaining credit on the form expired on December 31, 2021. 32

Employers Claimed
$20.7 Billion in Tax
Credits and Deferred
$123.6 Billion in
Payroll Taxes for
2020, but Use Varied
Self-Employed Individuals Employers claimed more than 1.8 million leave credits totaling almost $10
Accounted for More Than billion for 2020 (see table 3). 33
Two-Thirds of Leave
Credit Filings; Five
Industry Sectors
Accounted for More Than
70 Percent of Claim
Dollars
Table 3: Number and Dollars of Sick and Family Leave Credits Claimed, 2020

Average credit per
Number of credits Number of Dollars claimed employer, quarterly filers Average credit per employer,
claimeda employers claimingb (dollars in billions) (dollars)c annual filers (dollars)d
1,818,676 1,509,611 9.8 15,450 1,902
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104280

Notes: The dollar figures we are reporting are as reported by taxpayers and are subject to taxpayer
reporting error. These figures may differ from IRS’s reported figures because we are reporting what
was filed without adjustments. The table includes: 2020 Forms 941 (second through fourth quarters

32IRS’s website stated that the last day to file Form 7200 to request an advance payment
for the fourth quarter of 2021 was January 31, 2022. Employers may still file a request for
an advance for leave credits if it involves wages paid for leave taken prior to October 1,
2021.
33Our definition of “employers” here includes employment tax return filers and self-
employed individuals (who may not have employees), who report leave credits and
deferrals on Form 1040, Schedule 3.

Page 13 GAO-22-104280 COVID 19
2020), 943, and 944, data as of January 2022, and sick and family leave credits for self-employed
individuals reported on 2020 income tax returns, data as of December 2021.
a
Each employer claiming the credit in a single quarter is counted as claiming the credit once
regardless of the number of employees, but separately counting self-employed individuals as
described below. The total number of credits claimed is across multiple quarters of 2020; employers
claiming the credit in more than one quarter count as a credit for each quarter it is claimed.
b
The count of employers includes self-employed individuals filing on Form 1040 for a tax credit for
their own COVID-19 related leave. These individuals may have also claimed a credit on an
employment tax return for their employees’ leave. We did not conduct analysis to link Form 1040
filers with employment tax returns. There were 514,456 employers claiming credits on Forms 941,
943 and 944 that could also be part of the Form 1040 filing population.
c
Form 941 filers.
d
Forms 943, 944, and 1040 filers.

Based on partial data from Form 941 filings available in January 2022,
employers claimed more than 360,000 leave credits, totaling almost $8.9
billion for 2021. 34 When comparing filing patterns, 2021 leave credit
usage in dollars is likely to surpass 2020 amounts. This is likely because
of changes to the credit from ARPA, such as:

• expanding eligibility to include state and local governments and
certain tax exempt federal entities, 35
• increasing the per employee family leave credit limit from $10,000 to
$12,000, and
• expanding the definition of qualifying paid leave to include
vaccinations and waiting for COVID-19 test results.
We did not calculate a take-up rate—the percentage of eligible employers
who claimed a credit—because eligibility cannot be determined based
solely on filed return data. Payroll records or other information are
needed to confirm an employer was eligible for the credits. 36 For example,
data are unavailable on the number of employees who were granted paid

34These data are mostly from e-filed Forms 941, as IRS continues to process paper 2021
Forms 941, as of March 2022. Annual return data were unavailable in time for our
analysis. The e-file data includes some Forms 941 from the first three quarters of 2021. In
the 2020 data, employers claimed 818,680 credits on Form 941, totaling $7.9 billion. The
remaining million credits are from other filers, mostly Forms 1040.
35Based on 2020 Bureau of Labor Statistics data, state and local governments had almost
19 million employees.
36We have ongoing work which includes an estimate of differences in usage of ERC,
leave credits, and payroll tax deferrals by small business owners by race, ethnicity, and
sex.

Page 14 GAO-22-104280 COVID 19
sick and family leave related to COVID-19, according to Department of
Labor officials. 37

A large number of self-employed individuals who file on annual income
tax returns drove the difference in average credit size. 38 Specifically,
about 66 percent of employers claiming leave credits did so on income
tax returns. 39 The average credits these filers received were smaller
($1,865), compared with other employers ($15,393 average).
Corporations were about 23 percent of leave credit claimants. 40

Employers from five sectors claimed about 71 percent of leave credit
dollars for 2020. 41 Professional, Scientific, and Technical Services (about
$2.5 billion) and Manufacturing (about $1 billion) claimed the highest

37We identified one research paper that used tax data and modeling to estimate the share
of employers claiming the credits for 2020 and 2021. The paper found the following 2020
take-up rates for employers: leave credits, between 3.7 and 6.8 percent; ERC, between
0.7 and 1.3 percent; and payroll tax deferrals, 3 percent. See Goodman, Lucas, Take-up
of Payroll Tax-Based Subsidies During the COVID-19 Pandemic (Washington D.C.: Nov.
8, 2021).
38“Self-employed individuals” are considered to be employers for purposes of the credits,
even if they do not have employees. They include filers of Forms 941, 943, or 944, who
are also required to file certain individual tax returns or who IRS data identified as sole
proprietors. They also include individuals who file Form 1040, Schedule H, Household
Employment Taxes, or Schedule SE, Self-Employment Tax.
39Self-employed individuals who could not work due to COVID-19 and household
employers claim leave credits on their annual income tax returns, and therefore would
have counted as one credit for 2020, similar to filers of Forms 943 and 944. Form 941
filers could have filed for leave credits for up to three quarters in 2020. Self-employed
individuals could also claim leave credits on their employment tax return for their
employees’ COVID-19 related leave, which would be counted separately as another
credit. We did not conduct analysis to link Form 1040 filers with employment tax returns.
There were 514,456 employers claiming credits on Forms 941, 943 and 944 that could
also be part of the Form 1040 filing population.
40We categorized employers based on filing requirements and other IRS data. We made
certain assumptions to categorize employers that had more than one filing requirement
and those with complex structures. See appendix I for more details. Partnerships made
about 5 percent of the leave credit employer claims, and tax-exempt organizations
(including churches) made about 2 percent. Non-corporate claimants of the credits, such
as partnerships, may be related to a corporation. Employers with missing data and other
entities, such as estates and trusts, made up the remaining 3.4 percent. Governments and
certain political subdivisions, agencies, or instrumentalities were ineligible for the leave
credits for 2020 wages.
41These sectors are: Professional, Scientific and Technical Services; Manufacturing;
Health Care and Social Assistance; Construction; and Retail Trade. There are a total of 20
sectors.

Page 15 GAO-22-104280 COVID 19
dollars of leave credits. In prior work, we used information from the 2020
Bureau of Labor Statistics’ Business Response Survey to identify six
“hardest-hit” sectors, or sectors that were most likely to experience
adverse effects to business operations as a result of the pandemic. 42
Three of these sectors are among the top five leave credit claimants;
figure 1 also shows the three other “hardest-hit” sectors, which claimed
much smaller dollar amounts.

Figure 1: Sick and Family Leave Credit Dollars Claimed by Top Five and “Hardest-Hit” Sectors, 2020

42These six sectors are (1) Accommodation and Food Services; (2) Arts, Entertainment,
and Recreation; (3) Educational Services; (4) Health Care; (5) Manufacturing; and (6)
Retail Trade. See GAO, Paycheck Protection Program: Program Changes Increased
Lending to the Smallest Businesses and Underserved Locations, GAO-21-601
(Washington D.C.; Sept. 21, 2021).

Page 16 GAO-22-104280 COVID 19
through fourth quarters 2020), 943, and 944, data as of January 2022. Sectors are based on the
North American Industry Classification System. In prior work, we used information from the 2020
Bureau of Labor Statistics’ Business Response Survey to identify six “hardest-hit” sectors, or sectors
that were most likely to experience adverse effects to business operations as a result of the
pandemic. See GAO-21-601.

Overall, the average credit amount per employer across all sectors was
$15,629, as shown in table 4. See appendix II for data on all 20 sectors
and appendix III for more detailed data on selected sectors.

Table 4: Top Average Sick and Family Leave Credit Amounts per Employer, by
Sector, 2020

Average credit amount,
Industry sector dollars
Professional, Scientific, and Technical Services 47,712
Public Administration 22,952
Mining, Quarrying, and Oil and Gas Extraction 22,118
Manufacturing 21,148
Utilities 19,633
All 20 sectors 15,629
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104280

Corporations Were about Employers claimed 168,918 ERCs totaling about $10.9 billion for 2020, as
62 percent of Employers shown in table 5.
Claiming ERC for 2020

Table 5: Number and Dollars of Employee Retention Credits Claimed, 2020

Average credit per
Number of credits Number of employers Dollars claimed (dollars employer, quarterly Average credit amount,
claimeda claiming in billions) filers (dollars)b annual filers (dollars)c
168,918 119,834 10.9 92,182 19,278
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104280

Notes: Dollar figures we are reporting are as reported by taxpayers and are subject to taxpayer
reporting error. These figures may differ from IRS’s reported figures because we are reporting what
was filed without adjustments. The table includes: 2020 Forms 941 (data on first through fourth
quarters 2020) 943, and 944, data as of January 2022.
a
Each employer claiming the credit in a single quarter is counted as claiming the credit once. The total
number of credits claimed is across multiple quarters of 2020; employers claiming the credit in more
than one quarter count as a credit for each quarter it is claimed.

Page 17 GAO-22-104280 COVID 19
b
Form 941 filers.
c
Forms 943 and 944.

In addition, employers claimed 367,285 ERCs totaling about $32 billion
for 2021 based on partial Form 941 data available in January 2022. 43 The
increased number of credits and dollars claimed is likely because CAA,
2021, expanded eligibility to PPP borrowers with forgiven loans and other
entities, such as colleges and universities. It also increased credit
maximums from $5,000 per employee for all quarters in 2020, to $7,000
per quarter in 2021. Further, it increased the definition of large employer
from 100 to 500 employees and redefined “decline in gross receipts,”
which further widened the population of eligible employers.

We also found 8,564 Forms 941-X filed after December 31, 2020, claimed
about $470.5 million of ERCs. 44

Looking at ERCs by employer type, we found that about 62 percent of the
employers claiming the ERC for 2020 were corporations. Partnerships
and tax-exempt organizations (including churches) were each about 9
percent of claimants, followed by self-employed individuals (about 8
percent). 45

We also analyzed ERC claims by sector. Unlike the distribution of leave
credits, where one sector claimed almost a third of credit dollars, ERC
amounts were more widely distributed among several sectors. The
Accommodation and Food Service sector claimed the highest percentage
(15 percent) of ERCs in 2020. Two other “hardest-hit” sectors, Retail
Trade and Manufacturing, followed closely behind at 13 and 12 percent
respectively. See figure 2.

43These data are on e-filed Forms 941 and include incomplete data for three quarters of
2021. Also, as of March 2022, IRS continues to process 2021 Forms 941. Annual return
data were unavailable in time for our analysis.
44These credits are likely to be retroactive 2020 ERC’s. Data are as of November 25,
2021.
45Among self-employed individuals, ERC could only be claimed for those with employees.
We had insufficient data to categorize about 12 percent of the employer claimants. The
remaining employers were other entities, such as estates and trusts and state and local
agencies.

Page 18 GAO-22-104280 COVID 19
Figure 2: Employee Retention Credits by Top Five Dollars Claimed and “Hardest-
Hit” Sectors, 2020

Although the Accommodation and Food Service sector claimed the
highest percentage of credits, the sector’s average credit size, per
employer, of $90,298 was not among the top averages. Other sectors,
shown in table 6, had higher average credit amounts.

Page 19 GAO-22-104280 COVID 19
Table 6: Top Average Employee Retention Credit Amounts per Employer, by Sector,
2020

Average credit amount,
Industry sector dollars
Management of companies and enterprises 353,509
Transportation and warehousing 272,095
Manufacturing 250,440
Information 209,789
Utilities 175,458
All 20 sectors 83,876
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104280

Employers across Industry Employers deferred almost $124 billion of payroll tax in 2020 (see table
Sectors Deferred Payroll 7). About 99 percent of that amount was for the employer share of payroll
tax. The dollar amount of payroll tax deferrals was much larger than leave
Taxes
credits and ERC. Only about 3 percent of employers deferred payroll
taxes in 2020. 46 The payroll tax deferral period ended on December 31,
2020. As of December 31, 2021, there were 89,376 employers (other
than self-employed individuals) with an unpaid employer or employee
share deferral amount, according to IRS officials. 47 These unpaid
amounts total almost $20 billion. 48

46This calculation is based on the total number of deferrals reported by an employer with a
unique employee identification number on Forms 941, 943, and 944, and the total number
of filers of these forms. We did not calculate a percentage with self-employed individuals
because of challenges defining the population of self-employed individuals.
47According to IRS officials, there may be some deposits or payments made close to or
after the due date that were not yet captured in these counts. This count only includes
employment tax return filers. IRS officials said they sent letters to employers with unpaid
deferrals in October and November 2021. After the December 31, 2021, deadline,
employers with payments remaining will receive a notice with possible penalties,
according to the officials.
48The unpaid deferrals are about 16 percent of the $123.6 billion of deferrals made on
employment tax returns in our analysis.

Page 20 GAO-22-104280 COVID 19
Table 7: Number and Amount of Payroll Tax Deferrals for 2020

Average deferral per Average deferral,
Number of employers Dollars deferred employer, quarterly annual filers
Number of deferralsa using deferrals (dollars in billions) filers (dollars)b (dollars)c
1,280,543 1,026,282 123.6 623,530 1,237
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104280

Notes: Dollar figures we are reporting are as reported by taxpayers and are subject to taxpayer
reporting error. The table includes 2020 Forms 941 (data on first through fourth quarter 2020), 943,
and 944, data as of January 2022, and deferrals for self-employed individuals reported on 2020
income tax returns, as of December 2021.
a
Each employer making a deferral in a single quarter is counted as a making one deferral. The total
number of deferrals is across multiple quarters of 2020; employers deferring tax in more than 1
quarter count as a deferral for each quarter.
b
Form 941 filers.
c
Forms 943, 944, and 1040 filers.

Many self-employed individuals deferred payroll tax but in relatively small
amounts. About 82 percent of employers deferring payroll tax were self-
employed individuals. About 11 percent of employers deferring payroll tax
were corporations. 49

By sector, the Manufacturing and Professional, Scientific, and Technical
Services sectors had the highest dollars of taxes deferred, about 17 and
13 percent of credit dollars respectively. Of the top five sectors using
deferrals, three are also “hardest-hit” sectors: Manufacturing, Health Care
and Social Assistance, and Retail Trade. The other three “hardest-hit”
sectors each were responsible for less than 3 percent of the total deferral
dollars (see fig. 3).

49About 3 percent of employers using deferrals were partnerships. The remaining 4
percent of deferral dollars were claimed by other entities—such as state and local
entities—or did not have data to allow us to categorize them.

Page 21 GAO-22-104280 COVID 19
Figure 3: Payroll Tax Deferrals Used by Top Five Dollars Claimed and “Hardest-Hit” Sectors, 2020

Notes: Dollar figures and sector information we are reporting are as reported by taxpayers and are
subject to taxpayer reporting error. The figure includes: 2020 Forms 941 (data on first through fourth
quarters 2020), 943, and 944, data as of January 2022. Sectors are based on the North American
Industry Classification System. In prior work we used information from the 2020 Bureau of Labor
Statistics’ Business Response Survey to identify six “hardest-hit” sectors, or sectors that were most
likely to experience adverse effects to business operations as a result of the pandemic. See
GAO-21-601.

Two sectors—Public Administration and Utilities—have significantly
higher deferral averages, as shown in table 8. The high average for
Public Administration is driven by the relatively few unique employer
identification numbers reporting deferral usage.

Page 22 GAO-22-104280 COVID 19
Table 8: Top Average Payroll Tax Deferral Amounts per Employer, by Sector, 2020

Average deferral amount,
Industry sector dollars
Public administration 42,618,173
Utilities 2,812,770
Manufacturing 1,161,930
Transportation and warehousing 1,082,708
Educational services 1,051,881
All 20 sectors 602,923
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104280

Notes: Dollar figures and sector information we are reporting are as reported by taxpayers and are
subject to taxpayer reporting error. The table includes: 2020 Forms 941 (data on first through fourth
quarters 2020), 943, and 944, data as of January 2022. Sectors are based on the North American
Industry Classification System.

Industry Representatives In interviews, representatives from the payroll and tax preparer industries
Had Mixed Views on the and business groups recognized some benefits of each of the
employment tax provisions. The leave credits, ERC, and deferrals
Usefulness of the COVID-
provided some helpful financial assistance to employers. However,
19 Tax Relief Provisions challenges with employers’ awareness of the leave credits and deferrals
for Employers and with timing of relief for the ERC may have limited their financial
effectiveness. 50

Leave credits. The leave credits helped some employers with employee
retention and general finances, according to a business representative
and some payroll and tax professionals. The leave credits were
particularly helpful during 2020 when paid sick and family leave was
mandated for COVID-19-related absences, according to a business group
representative and a tax professional. However, according to two
business group representatives, the use of leave credits may have been
limited since some employers lacked awareness of the credits. 51 Further,
some businesses were confused about filing requirements or did not want
to use resources or professional support to file for the leave credits,

50The industry groups we contacted for interviews were selected due to their large size
and representation of businesses, or professionals with employer clients, that may be
eligible for the tax credits. These statements are not generalizable to all employers. See
appendix I. We are continuing to gather information about small businesses’ use of these
provisions as part of our work on tax policy effects on small businesses by race, ethnicity,
and sex. We expect to report the results later in 2022.
51We previously reported that employers and employees were not always aware of, or did
not always understand, Families First Coronavirus Response Act paid sick and family
leave provisions. See GAO-21-551.

Page 23 GAO-22-104280 COVID 19
according to representatives from five business groups. Four payroll
professionals said their clients either have not needed to use the leave
credits or used them minimally.

ERC benefits. While the ERC was helpful to many employers,
representatives we spoke with questioned its true effectiveness. The ERC
was less favored in 2020, compared with the more generous dollar
amounts available from the Paycheck Protection Program (PPP),
according to two business group representatives and several payroll
professionals. Once the ERC eligibility opened to PPP borrowers, many
employers decided it was worthwhile to claim the credit retroactively,
according to eight of the 11 tax and payroll professionals we interviewed.
However, retroactive filing requirements combined with processing delays
likely reduced the benefit, and therefore the usefulness of the credits for
many of these employers, according to several of the professionals. The
delayed processing of refunds meant that businesses could not benefit or
were strained waiting for money, according to some of the payroll
professionals. One tax professional said some companies had already let
go of their employees if they were unable to pay them during 2020. 52

Payroll tax deferrals. Based on our analysis, overall use of the payroll
tax deferrals was low per employer. However, representatives who said
their clients did take advantage of the deferrals found them useful. In April
and May 2021, all 10 of the payroll and tax professionals from two groups
we spoke with said the employer share deferral was the most widely used
of the tax-related COVID-19 relief provisions for employee retention
among their clients. According to one of these professionals, the deferrals
functioned like an interest free loan. Three business group
representatives told us that the deferrals helped provide cash flow.
However, two representatives said some employers were unaware of the
deferrals. Two other representatives said the deferrals were difficult to
navigate or employers did not have the resources to access the relief.
One other business group representative said many of their members did
not see the deferral as valuable. For this business group and a payroll
professional, smaller businesses were less likely to use the deferrals.

Professionals from a tax preparer group and two payroll groups
highlighted reasons why the employee share of payroll tax deferrals were

52According to our analysis, ERC dollars claimed for 2021 are higher than dollars claimed
for 2020 ERCs.

Page 24 GAO-22-104280 COVID 19
used more widely. 53 For example, some representatives believe the
deferrals put employees in a poor position when withholding of the
deferred payroll taxes resumed. One payroll professional said the deferral
is deceiving because employees may think they are getting a tax break.
According to some payroll professionals, employers feared liability for the
taxes if an employee departs.

Prior to the pandemic, few tax credits were claimed on employment tax
IRS Could Improve Its returns. Accordingly, IRS compliance efforts focused more on other
Approach to areas, such as wage reporting. From 2010 to March 2020, IRS only
administered three credits on the Form 941 and one credit on the Form
Mitigating Taxpayer 941-X. 54 Historically, issues for employment tax noncompliance were
Compliance Risks typically related to the reporting of taxable wages, specifically regarding
worker classification, fringe benefits, and payment recharacterization. 55
The unusual nature of the COVID-19-related credits, the rapid
implementation, and multiple changes to the credits created a unique
compliance risk environment. While IRS is addressing some of these
risks, we found opportunities for IRS to strengthen its compliance
planning to better manage risks.

IRS Would Benefit from IRS’s plans to address potential noncompliance for ERC and leave credit
Following Project claimants partially demonstrated relevant project management practices
we selected for review, but could benefit from expanded use of these
Management Practices to practices. 56 IRS quickly developed an initial compliance plan for the tax
Guide Taxpayer credits in May 2020. As the pandemic and legislation continued to
Compliance Efforts develop, IRS updated this plan in six more documents, with the first two in
August and November 2020, and again in February, May, September,

53According to our analysis, the employee share of payroll tax deferrals was only about 1
percent of all deferred payroll taxes.
54We reviewed past credits on the Form 941 and Form 941-X back to tax year 2010. The
advanced payment of Earned Income Credit was administered on the Form 941 for 2010.
The COBRA premium assistance credit was administered on the Form 941 for 2010 to
2013 and then on the Form 941-X for 2014 to 2020. The Qualified Small Business Payroll
tax credit was administered on the Form 941 for 2017 to 2021 (the latest form available).
55GAO, Employment Taxes: Timely Use of National Research Program Results Would
Help IRS Improve Compliance and Tax Gap Estimates, GAO-17-371 (Washington D.C.:
Apr. 18, 2017).
56Project management practices are 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
Project Management Institute is a not-for-profit association that provides global standards
for, among other things, project and program management. See appendix I for more
details on our selection and evaluation of IRS’s application of the practices in this audit.

Page 25 GAO-22-104280 COVID 19
and November 2021. IRS’s COVID-19-related compliance planning
efforts consist principally of these seven planning documents.
Additionally, IRS developed a project plan with expected and actual
completion dates for the overall implementation of the credits, and the
project plan included a subset of compliance activities.

IRS’s Small Business/Self Employed division (SB/SE) also develops an
annual examination work plan that includes employment tax, which
estimates numbers of examinations and numbers of examination staff.
Although SB/SE officials said the draft fiscal year 2022-2023 examination
work plan includes examinations on the COVID-19 tax credits, those
credits listed under “other issues.”

IRS would benefit from leveraging key project management practices to
guide its plans and to systematically identify and prioritize compliance
risks and effectively deploy resources to address those risks. The Project
Management Body of Knowledge (PMBOK® Guide) includes proven
traditional practices that are widely applied as well as innovative practices
that are emerging in the field of project management. 57 We examined the
PMBOK® Guide and determined that three sections contained the most
relevant criteria for assessing IRS’s compliance planning documents:
Project Integration Management, Project Schedule Management, and
Project Stakeholder Management. 58

Project integration management. (Partially met.) This includes the
processes and activities to identify, define, combine, unify, and coordinate
the various processes and project management activities. Relevant
subsections of project integration management include: developing a
project charter, developing a project management plan, directing and

57Given the temporary nature of the COVID-19 credits, PMBOK® Guide’s definition of a
project—a temporary endeavor undertaken to create a unique product, service, or result—
is relevant for IRS’s compliance efforts in this area. IRS compliance planning documents
do not include the COVID-19-related employer deferrals within their scope. According to
IRS officials, IRS plans to use its established processes for deferral compliance.
58We reviewed the PMBOK® Guide and determined that these sections were relevant
based on the context of evaluating our objective. Each of these sections contain different
subsections against which we evaluated IRS’s practices. We included a breakdown of the
subsections for the Project Integration Management section because they were distinct
and relevant to our analysis. For more details, see appendix I.

Page 26 GAO-22-104280 COVID 19
managing project work and knowledge, performing integrated change
controls, and monitoring and reviewing performance. 59

• Develop a project charter. According to the PMBOK® Guide, a
project charter formally authorizes the existence of a project, provides
the project manager with the authority to apply organizational
resources to project activities, and provides a direct link between the
project and the strategic objectives of the organization. The PMBOK®
Guide states that these objectives should be measurable and contain
related success criteria. IRS has components of a project charter in its
compliance planning documents. 60 For example, the May 2020 plan
notes that IRS’s responsibilities to ensure compliance with the
COVID-19 legislation support IRS’s strategic goal to protect the
integrity of the tax system by encouraging compliance through
administering and enforcing the tax code. This plan includes three
objectives; they are not measurable and do not include criteria to
measure success. For example, one objective focuses on risk
mitigation goals and information technology tools, business rules,
controls, and guidance to prevent known and potential compliance
risks. However, this cannot be easily measured because there are no
criteria to measure whether or not the tools and business rules
sufficiently mitigate risks. Additionally, the objectives do not appear in
the six subsequent planning documents, and were not otherwise
updated to reflect subsequent changes in the law.
• Develop a project management plan. The PMBOK® Guide defines
a project management plan as a comprehensive document that
defines the basis of all project work and how the work will be
performed. This includes defining, preparing, and coordinating all plan
components and consolidating them into an integrated project
management plan. IRS does not have a comprehensive document
that explains all relevant project components. IRS officials stated that
all seven plans are valid. Therefore, they do not supersede each
other. However, in the plans, IRS does not track progress occurring
between them. In addition, the structures of the plans differ. The plans
exclude some compliance activities. IRS officials described—and we
59Developing a project management plan starts with developing a project charter, and
then defining, preparing, and coordinating all plan components and consolidating them
into an integrated project management plan. The key benefit of this process is the
production of a comprehensive document that defines the basis of all project work and
how the work will be performed.
60Federal law, including the Families First Coronavirus Response Act and the CARES Act,
authorizes IRS to implement the COVID-19 tax provisions, and therefore acts as an
inherent component of a charter.

Page 27 GAO-22-104280 COVID 19
identified in other documentation—several processes related to tax
credit compliance that were not mentioned in the planning documents.
For example, the planning documents do not mention that SB/SE’s
Office of Fraud Enforcement is reviewing certain Forms 7200
containing information that indicate potential fraud.
• Direct and manage project work and knowledge. According to the
PMBOK® Guide, managing the project work and knowledge includes
performing the work defined in the plan, using existing knowledge,
and learning to achieve the project’s objectives. IRS has started
executing some planned project activities and has used some existing
institutional knowledge to start the compliance process. 61 However, it
has also begun other work that is not mentioned in the planning
documentation. For example, according to IRS officials, some specific
compliance activities have been developed, but this information is
neither included nor described within the planning documentation.
Thus, it is unclear whether this information contributes to achieving
the project’s objectives.
• Perform integrated change control. The PMBOK® Guide defines
this as the process of reviewing all change requests, approving
changes, and managing changes to deliverables, project documents,
and the project management plan. It also includes communicating the
decisions. Documented changes within a project should be
considered in an integrated manner, which addresses overall project
risk. We found that IRS did not have consistent communication of
activities and changes in its planning documents or in actual project
implementation. For example, according to IRS officials, IRS revised
the scope and timing of certain exam and review activities, but the
plans do not discuss the change, therefore not addressing the
approval and rationale for the change.
• Monitor and control project work. The PMBOK® Guide outlines this
step as the process of tracking, reviewing, and reporting the overall
progress to meet the performance objectives defined in the project
management plan. As noted above, IRS does not have measurable
objectives for the projects and IRS’s compliance planning documents
do not discuss measuring, monitoring, or evaluating components for
the performance of the project.
Project schedule management. (Partially met.) According to the
PMBOK® Guide, project schedule management is an integral part of the
project planning process. It includes the processes required to manage
61For example, IRS used senior employees who had experience reviewing IRS forms as
revenue officers and agents to review the new Form 7200, according to IRS officials.

Page 28 GAO-22-104280 COVID 19
the timely completion of the project by defining and sequencing activities.
Project schedules should identify and document specific actions to be
performed and establish an understanding of the relationships between
project activities.

IRS’s compliance planning documents list activities at a high level but the
documents do not comprehensively identify specific planned actions or
identify any interdependencies or sequencing of activities. For example,
the November 2021 compliance plan references the general timing of
actions for specific credit claimant populations, such as employers who
claimed both the ERC and had a forgiven Small Business Administration
PPP loan. However, there are no specific tasks in the compliance
planning documents, and it is unclear how or if the actions are related, or
whether a specific sequence is needed to ensure timely completion of the
project.

IRS’s project plan lists different topic areas and tracks task progress.
Although these lists include tasks that are related to compliance, the
document does not include many items that IRS said it is developing—
such as examination selection criteria and filters. A schedule that
identifies all activities and their interdependencies and sequencing would
help IRS keep its efforts on track for timely completion.

Project stakeholder management. (Partially met.) According to the
PMBOK® Guide, stakeholder management includes the processes
required to identify the people, groups, or organizations that could affect
or be affected by the project, to analyze stakeholder expectations and
their effect on the project, and to develop appropriate management
strategies for effectively engaging stakeholders. Plans that are
comprehensive and list all relevant entities, processes, decisions, and
risks, can clarify responsibilities and reduce potential confusion. IRS’s
efforts in this area were inconsistent and incomplete. For example, IRS’s
May 2020 compliance planning document states that the Specialty Tax
COVID Team will develop a service-wide approach to address
compliance. However, subsequent planning documents are limited in their
discussion of the roles and responsibilities of other entities within IRS,
such as Accounts Management processing adjusted returns, and there
are no mentions of SB/SE’s Office of Fraud Enforcement, which is
involved in reviewing credits.

According to compliance planning documents, the processing delays of
2020 tax returns negatively affected the timing of compliance planning.
IRS officials stated that they did not want to develop components of the

Page 29 GAO-22-104280 COVID 19
compliance plans while processing returns because they needed to study
the entire population of returns. An official also stated that, historically,
compliance plans do not list all functions supporting the processing or
reviewing of credits.

According to IRS officials, as of December 2021, IRS had transcribed
2020 employment tax returns and was developing examination selection
criteria that they expect to be implemented by October 2022. As IRS
prepares to increase compliance activities, the agency would benefit from
developing a comprehensive and cohesive project plan to guide this effort
that is based on established project management practices. This would
help ensure that compliance risks are adequately identified and
addressed and that resources are maximized.

IRS Has Not Documented IRS has begun creating new processes to address compliance risks,
New Processes to including risks with adjusted returns. IRS is also researching the
population of employers who have claimed multiple credits with restricted
Address Some
wages. Wage restrictions generally prohibit an employer from counting
Compliance Risks certain wages toward multiple tax credits. However, these efforts are not
included in IRS’s compliance documentation.

Adjusted returns. The CAA, 2021, further expanded ERC eligibility to
include PPP borrowers, among others, and allowed for the credit to be
claimed retroactively, for 2020, on adjusted returns. In calendar year
2021, IRS received 738,422 Forms 941-X, a 127 percent increase
compared to 2019. 62 Adjusted returns can only be filed on paper, and
have not historically been subject to the same controls as regular
employment tax returns. IRS employees manually process adjusted
returns prior to making account adjustments and issuing refunds. If a
claim meets a certain dollar threshold and other criteria, it may be
referred to SB/SE for examination consideration. 63

62We did not compare with 2020 because of pandemic-related disruptions and because
adjusted returns resulting from CAA, 2021, changes would not have been received in
2020. The 2021 data are as of November 22, 2021, and are incomplete with receipts still
being entered into the data system. Aside from ERC claims there are other reasons that
could cause an employer to file an adjusted return, such as correcting an error.
63These criteria are referred to as “Category-A” and they are intended to identify high-
dollar amounts and other possible compliance issues. SB/SE employees examining these
claims are instructed to review credit maximums and research information in IRS systems
that affect credit calculations, such as the number of employees and wages and PPP loan
forgiveness.

Page 30 GAO-22-104280 COVID 19
An IRS official stated that in March 2021, SB/SE started discussing
computer programming to check the COVID-19 credits claimed on
adjusted returns against eligibility requirements. The official said SB/SE
plans to use the same filters that are under development to check for
potential noncompliance on Form 941 filings. 64 Implementing these filters
could potentially help IRS address compliance risks posed by adjusted
returns. However, IRS’s plans for developing and using the filters are not
mentioned in IRS’s compliance planning documents. An SB/SE official
said the compliance plan is an overarching document, but the compliance
review process for adjusted returns is specific to one unit within SB/SE.

In April 2022, as part of IRS’s review of a draft of this report, the agency
provided a document listing filters for tax credit eligibility that would be
applied to employment tax data, including adjusted return information.
The document provided information on data sources and thresholds for
review for possible examination. However, it does not discuss how and
when the filters will be implemented, including how processing backlogs
for adjusted returns may affect 2020 account information. Therefore, it is
unclear whether the filters can be run on complete 2020 return data,
which includes retroactive ERC’s filed on adjusted returns. The project
plan and compliance plans that IRS provided did not discuss timeframes
for these steps and sequencing of collecting return data and running
filters. Not documenting the development, methodology, and next steps
creates risks to continuity of operations and potentially limits transparency
and oversight of these activities.

Tax credits with wage restrictions. For the second through fourth
quarters 2020, we found an average of 7,026 employers that claimed
both a leave credit and ERC per quarter, and therefore potentially claimed
credits on the same wages for these two credits. 65 Employers cannot

64When processing adjusted returns, IRS reconciles the original return with the adjusted
return, according to an IRS official. Although adjusted returns are not transcribed, the
reconciled changes are transcribed and will be what the filters are run against, according
to the official.
65These data are taxpayer reported credits on Form 941, and may contain taxpayer
errors. Data are as of January 2022.

Page 31 GAO-22-104280 COVID 19
claim the ERC for wages taken into account for purposes of the leave
credits and five other tax credits. 66

In May 2020, IRS performed a risk assessment that included the wage
restrictions on the ERC and the leave credits. IRS identified the
restrictions against using the same wages for purposes of the ERC, leave
credits, and Work Opportunity Tax Credit as “high risk” and stated that the
risk would be handled through postfiling compliance activities. In April
2022, IRS provided research results on four of the non-COVID related
credits that indicated a very small number of employers had claimed
credits with potential restricted wages. 67 As a result, IRS officials said
they determined the risk was not an issue and they would re-evaluate this
risk when they begin working with 2021 returns. However, IRS’s research
did not address potential use of restricted wages between ERC and leave
credit claimants. In its compliance plans, IRS also did not address how it
would specifically address this risk during postfiling compliance activities.

Internal control standards state that effective documentation establishes
and communicates the who, what, when, where, and why of internal
control execution. 68 Documentation provides a means to communicate
the knowledge that may be limited to a few personnel to both internal and
external stakeholders. Without documentation on the adjusted return and
restricted wage compliance processes, the timeline for completion and
expected outcomes of the processes are unclear. Additionally,
undocumented changes in the internal control system can affect efforts to
monitor and evaluate internal control issues. Documenting the processes
could help inform efforts for future tax credits with similar rules.

66The other tax credits are the Work Opportunity Tax Credit, and—for calendar quarters
beginning after December 31, 2020—the Qualified Small Business Research Credit,
Active Duty Members Credit, Indian Employment Credit, and the Empowerment Zone
Employment Credit. CARES Act Pub. L. No. 116-136, § 2301(c)(3)(A)(ii), (h)(2), 134 Stat.
349, 350; CAA, 2021, Pub. L. No. 116-260, § 207(f)(1), 134 Stat. at 3063. Employers also
cannot claim sick and family leave credits for wages taken into account for the Work
Opportunity Tax Credit. FFCRA Pub. L. No. 116-127, § 7001(e)(1), 134 Stat. at 211.
67According to IRS officials, IRS does not plan to monitor compliance for the Indian
Employment Credit with wage restrictions on ERC and leave credits. Restrictions would
generally only apply to nontribal businesses with an employee and service performed
substantially on a reservation since certain tribal-owned businesses are not subject to
federal income tax and the Indian Employment Credit is used to offset those taxes.
68GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
(Washington, D.C.: Sept. 10, 2014).

Page 32 GAO-22-104280 COVID 19
Screening Filters Flagged IRS’s employment tax return screening flagged more than 65 percent of
Many Possible Ineligible the employer identification numbers (EIN) that we identified as possible
entities who may be ineligible for the leave credits or ERC. 69 Specifically,
Entities, but Additional
in preliminary data we found 337 EINs from employers who established
Screening Could Be their EINs in April 2020 or later, and filed for an employment tax credit on
Beneficial Form 941 in second quarter 2020, but then never filed an employment tax
return again. 70 These returns claimed more than $100 million in leave
credits and ERC. Of the 337 EINs, IRS held refunds and reviewed 196
EINs for possible identity theft. Approximately 30 other EINs were
reviewed as potential fabricated entities. 71 The remaining EINs did not
meet IRS’s criteria for reviews, based on the screening filters, according
to IRS officials.

There could be legitimate reasons for the credits—such as a newly
created business that failed in a short period. However, some of these
filers may not actually be employers or may be using a fabricated EIN,
which relies on stolen information, to complete and file employment tax
returns. Fabricated EINs and entities that are not actual employers are
ineligible for leave credits or the ERC. 72

In January 2020, we found IRS’s application system for new EINs had
control weaknesses, which can fail to identify fabricated EINs. 73 We
recommended that IRS conduct a fraud risk assessment to help IRS
establish a risk tolerance for the EIN application process and determine if

69Employment tax return screening involves using filters with criteria, prior to refund
issuance, to look for potential identity theft. Staff are responsible for resolving those cases
to both prevent IRS from paying out fraudulent refunds and ensure that legitimate
taxpayers’ returns are released for processing.
70Data were from August and September 2021, which we shared with IRS in December
2021 and January 2022. In an analysis based on January 2022 data, we found 438 filings
for employers established April 2020 or later that filed for a tax credit for second quarter
2020 and then never filed again. Due to lags with updating IRS’s databases, it is possible
that some Forms 941 data were unavailable in time for our analysis and therefore may
appear as an employer who stopped filing.
71To protect taxpayer privacy, IRS did not provide us with the exact number of EINs for
reporting, since counts were below 10 for certain filers.
72Under the Families First Coronavirus Response Act, only eligible employers engaged in
or affecting commerce are eligible to receive leave credits. Pub. L. No. 116-127, §
5110(2)(A)(ii), (B)(i)(I), 134 Stat. at 198–199. Under the CARES Act, only eligible
employers carrying on a trade or business during calendar year 2020 can receive the
ERC. Pub. L. No. 116-136, § 2301(c)(2)(A)(i), 134 Stat. at 348.
73 GAO, Identity Theft: IRS Needs to Better Assess the Risks of Refund Fraud of
Business-Related Returns, GAO-20-174 (Washington, D.C.: Jan. 30, 2020).

Page 33 GAO-22-104280 COVID 19
existing fraud controls are sufficient to address the vulnerabilities inherent
to this process. While IRS agreed with this recommendation, as of
February 2022, it had not provided evidence of any action to identify and
assess other inherent fraud risks to business identity theft, such as the
EIN application process. IRS had taken steps to assess fraud risk for 35
business-related tax forms, however.

Although the employment tax return screening flagged many of the
returns we identified with potentially ineligible credit claims, it is possible
some returns from fabricated EINs may have passed the filters and
received refunds. For example, annual employment tax returns are
subject to fewer filters. Also, none of the filters contain specific criteria to
identify entities established after the enactment of FFCRA and the
CARES Act. The control weaknesses in the EIN application system make
back end checks—such as filtering through already processed 2020 and
2021 returns—an important complement to the screening filters.

SB/SE officials shared a list of compliance areas that are under
consideration for using computerized filters to identify potential
noncompliance specific to the tax credits. These areas are still under
development, according to an SB/SE official, and they did not have any
further information in the most recent compliance plan. 74 IRS could
bolster its controls by using dates from the relevant legislation, refund
amount and filing data, the establishment date for the employer, and
other variables in filters to help identify tax credit recipients that may be
ineligible employers.

Control Weaknesses IRS’s internal controls did not reasonably assure that the ERC and leave
Resulted in Invalid Tax credits claimed on Form 941 were valid and accurate before refunds were
issued. Internal control standards indicate that management should
Credits
design control activities to achieve objectives and respond to risks, such
as designing appropriate types of control activities over information
processing, the proper execution of transactions, and that all transactions
are completely and accurately recorded.

To test controls over each program, we selected three generalizable
random attribute samples. Each sample contained 93 transactions. 75 We

74The compliance areas did not contain specific information. Only one area, “no prior
annual filing history,” relates to filing patterns that could suggest a fabricated entity.
75Each sample of 93 transactions was planned using a 5 percent tolerable error and a 1
percent expected error at a 95 percent confidence level.

Page 34 GAO-22-104280 COVID 19
also reviewed 100 percent of the ERC and leave credits outliers that
consist of transactions greater than $10 million and $7 million,
respectively.

From our generalizable sample, we found that IRS disbursed two ERC
and seven leave credits that the taxpayers did not claim on their Forms
941. We also found that IRS incorrectly posted a deferral of payroll taxes
of about $16 million that the employer claimed as a leave credit.

Further, we found inaccuracies in three ERC and four leave credits
claimed on Form 941. When we calculated the ERC or leave credit
amount using the Form 941 worksheet 1, Credit for Qualified Sick and
Family Leave Wages and the Employee Retention Credit’, and the
taxpayer’s information reported on Form 941, these credit amounts were
substantively different than the credit amounts that were claimed by the
taxpayer and disbursed by IRS. 76 IRS does not require the taxpayer to
provide worksheet 1 and does not validate the accuracy of the credits
before disbursement.

We identified six ERC errors out of the 93 randomly selected
transactions. Based on the results of ERC control testing, we estimate at
a 95 percent confidence level that 12.33 percent (a one-sided upper error
limit) of the population of ERC transactions are in error. We also identified
11 leave credit errors out of 93 randomly selected transactions. Based on
the results of leave credit control testing, we estimate at a 95 percent
confidence level that 18.81 percent (a one-sided upper error limit) of the
population of leave credits are in error. Further, we identified one ERC
outlier error and one outlier leave credit error.

To provide relief to taxpayers quickly, IRS decided to limit internal
controls that would have prevented invalid refunds related to the ERC and
leave credits claimed on Form 941. Since these credits expired on or
before December 31, 2021, IRS is not in the position to design and
implement these controls to address future refund claims related to ERC
and leave credits. However, IRS can continue to take action as part of its

76For the ERC and leave credits calculations on the Form 941 Worksheet 1, Credit for
Qualified Sick and Family Leave Wages and the Employee Retention Credit, we used the
information the taxpayer claimed on the Form 941 and the supporting documentation IRS
provided. However, because Worksheet 1 was unavailable and the information was not on
the taxpayer’s account for line 1g (related to Section 3121 (q) Notice and Demand) and
line 1j (related to Form 5884-C, Work Opportunity Credit for Qualified Tax- Exempt
Organizations Hiring Qualified Veterans), we assumed a zero dollar amount for these lines
in our calculation for the ERC and leave credits.

Page 35 GAO-22-104280 COVID 19
postfiling compliance or examination activities to address potential invalid
or inaccurate employer credit refund claims. In doing so, IRS would help
ensure taxpayers receive the appropriate tax treatment and that
transactions are recorded accurately.

In response to the COVID-19 pandemic and its effects on the economy,
Conclusions the ERC, sick and family leave credits, and payroll tax deferrals provided
billions of dollars of tax relief that could help employers maintain payroll
and address the health-related leave needs of employees. IRS
implemented these provisions—which were modified several times during
2020 and 2021—while it managed its own staffing and capacity
challenges related to the pandemic. The large dollar amount of this relief,
combined with IRS’s relatively limited experience administering credits on
employment tax returns, introduced a high level of risk for revenue loss.

Soon after the enactment of the CARES Act in March 2020, IRS began
documenting plans to address compliance related challenges with the tax
credits. As IRS moves toward selecting 2020 returns for examination and
other compliance actions in 2022, IRS could better address compliance
risks by using established project management practices to improve its
planning efforts. Such practices would help IRS systematically identify
and prioritize compliance risks and effectively deploy resources to
address those risks.

IRS’s compliance efforts would also benefit from documentation of
compliance-related processes that are already underway. IRS can help
ensure accountability and transparency with these processes by
documenting the steps being taken to check eligibility for credit claims on
adjusted returns and to ensure that tax credits are not claimed using
restricted wages. Further, developing filters to identify tax credits
potentially refunded to fabricated employers can help mitigate risks with
IRS’s EIN application system.

IRS’s decision to limit controls prior to disbursing refunds—to help
employers receive funds more quickly—contributed to the issuance of
some invalid tax credit refunds. IRS could use postfiling compliance or
examination activities to address already-issued tax credit refunds that
may have been in error or otherwise were invalid.

We are making the following five recommendations to IRS:
Recommendations for
Executive Action The Commissioner of Internal Revenue should develop an integrated
project management plan for the COVID-19 credits to improve IRS’s

Page 36 GAO-22-104280 COVID 19
ability to manage and plan compliance efforts related to these credits.
The plan should include

• measurable objectives;
• key activities to support accomplishment of objectives, including
documenting stakeholder involvement, knowledge sharing, and
integrated change control; and
• details surrounding measuring, tracking, or reviewing the performance
of the project, such as steps to verify if the actions of the plan were
successful at mitigating compliance risks IRS identified.
(Recommendation 1)
The Commissioner of Internal Revenue should document the processes
being used to address compliance risks associated with Employee
Retention Credit and leave credit claims on adjusted employment tax
returns. (Recommendation 2)

The Commissioner of Internal Revenue should document the processes
being used to address compliance risks associated with the Employee
Retention Credit and leave credits that rely on wages that cannot be used
for other tax credits. (Recommendation 3)

The Commissioner of Internal Revenue should implement additional
controls to help identify tax credit recipients who may be ineligible
employers. (Recommendation 4)

The Commissioner of Internal Revenue should update and implement
postfiling compliance or examination activities to address potentially
invalid or inaccurate employer credit refund claims that were not
prevented by internal controls. (Recommendation 5)

We provided a draft of this report to IRS and the Department of the
Agency Comments Treasury for review and comment. IRS provided written comments, which
and Our Evaluation are summarized below and reproduced in appendix IV. IRS and Treasury
also provided technical comments, which we incorporated as appropriate.

In its written comments, IRS agreed with two recommendations and
disagreed with three. Specifically, IRS agreed with the recommendations
to document compliance risks associated with ERC and leave credit
claims on adjusted employment tax returns (recommendation 2), and to
document processes being used to address compliance risks associated
with ERC and leave credits that rely on wages that cannot be used for
other tax credits (recommendation 3).

Page 37 GAO-22-104280 COVID 19
IRS disagreed with the recommendation to develop an integrated project
management plan for the credits (recommendation 1). In its letter, IRS
said that it uses project management techniques. Its project plan includes
details to implement the project, including compliance. IRS’s compliance
plan helps identify compliance risks and maintain a broad, overarching
approach. IRS stated that post-processing compliance, in the form of
examinations that consider taxpayer documents, is its next step. IRS also
noted that the credits are temporary and the compliance efforts are now a
work stream for examinations. Thus, it says a project management plan is
no longer needed.

We acknowledge that IRS partially demonstrated the project management
practices from the PMBOK® Guide. However, without measurable
objectives, comprehensive planning documents and schedule
management, and other practices, IRS is not fully prepared to move
forward with compliance activities for the tax credits.

We also maintain that the temporary and unique nature of the credits
makes project management practices, including an integrated and
comprehensive plan, an important foundation for SB/SE’s compliance
efforts in this area. Releasing multiple versions of a compliance plan that
accumulate rather than supersede each other, and additional
documents—such as the project plan and the work plan—that are not
unified and do not show evidence of coordination, run counter to practices
such as those in the PMBOK® Guide.

IRS also disagreed with the recommendation to implement additional
controls to help identify tax credit recipients that may be ineligible
employers (recommendation 4). In its letter, IRS said there are existing
work streams to address these credits. IRS mentioned the Office of Fraud
Enforcement’s Potential Fabricated Entities Review Project. This project
targets fraud related to the credits and includes coordination with Criminal
Investigation. As we mention in the report, the Office of Fraud
Enforcement’s responsibilities related to the tax credits are not mentioned
in SB/SE’s planning documents. Therefore, although the Potential
Fabricated Entities Review Project may provide beneficial work on this
issue, its omission from planning documents underscores the need for
comprehensive planning and continued project management that includes
all relevant resources, processes and stakeholders.

Moreover, despite IRS’s disagreement with this recommendation, in April
2022, it provided documentation of a filter for employment tax return
screening that may help identify ineligible employers, such as fabricated
entities. We find this action encouraging and think it could help address

Page 38 GAO-22-104280 COVID 19
some of the compliance risks we identified. However, it remains unclear
how and when this filter will be integrated into IRS’s compliance activities,
particularly the examination work plan. The project plan does not include
tasks such as filters and examination selection criteria.

IRS also disagreed with the recommendation to update and implement
postfiling compliance or examination activities to address potentially
invalid or inaccurate employer credit refund claims that were not
prevented by internal controls (recommendation 5). We acknowledge the
challenge of balancing compliance activities with the need to assist
taxpayers, and the limitations of identifying invalid or inaccurate employer
credit refund claims prior to disbursing the refund. Thus our focus with
this recommendation is on the need for IRS to update and implement
postfiling examination and compliance activities to assess the validity and
accuracy of refund credits paid.

We are sending copies to the appropriate congressional committees, the
Commissioner of Internal Revenue, and other interested parties. In
addition, this report is available at no charge on the GAO website at
http://www.gao.gov.

If you or your staff has any questions about this report, please contact us
at (202) 512-3406 (clarkce@gao.gov) or (202) 512-6806
(lucasjudyj@gao.gov). Contact points for our offices of Congressional

Page 39 GAO-22-104280 COVID 19
Relations and Public Affairs are on the last page of this report. GAO staff
members who made major contributions to this report are listed in
appendix V.

Jessica Lucas-Judy
Director, Tax Issues Strategic Issues

Cheryl E. Clark
Director, Financial Management and Assurance

Page 40 GAO-22-104280 COVID 19
Congressional Addressees

The Honorable Patrick Leahy
Chairman
The Honorable Richard Shelby
Vice Chairman
Committee on Appropriations
United States Senate

The Honorable Ron Wyden
Chairman
The Honorable Mike Crapo
Ranking Member
Committee on Finance
United States Senate

The Honorable Patty Murray
Chair
The Honorable Richard Burr
Ranking Member
Committee on Health, Education, Labor, and Pensions
United States Senate

The Honorable Gary C. Peters
Chairman
The Honorable Rob Portman
Ranking Member
Committee on Homeland Security and Governmental Affairs
United States Senate

The Honorable Rosa L. DeLauro
Chair
The Honorable Kay Granger
Ranking Member
Committee on Appropriations
House of Representatives

The Honorable Frank Pallone, Jr.
Chairman
The Honorable Cathy McMorris Rodgers
Republican Leader
Committee on Energy and Commerce
House of Representatives

Page 41 GAO-22-104280 COVID 19
The Honorable Bennie G. Thompson
Chairman
The Honorable John Katko
Ranking Member
Committee on Homeland Security
House of Representatives

The Honorable Carolyn B. Maloney
Chairwoman
The Honorable James Comer
Ranking Member
Committee on Oversight and Reform
House of Representatives

The Honorable Richard E. Neal
Chairman
The Honorable Kevin Brady
Republican Leader
Committee on Ways and Means
House of Representatives

Page 42 GAO-22-104280 COVID 19
Appendix I: Objectives, Scope, and
Appendix I: Objectives, Scope, and
Methodology

Methodology

This report (1) describes the Internal Revenue Service’s (IRS)
implementation of COVID-19-related employer tax provisions; (2)
describes the characteristics of the employers leveraging these provisions
and selected perspectives on their usefulness; and (3) evaluates IRS’s
plans and actions to identify and address taxpayer compliance risks.

To describe IRS’ implementation of the sick and family leave credits
Objective 1 (leave credits), the Employee Retention Credit (ERC), and payroll tax
deferrals (collectively, “employer tax provisions”), we reviewed federal
laws and our prior work, including reviewing the status of actions to
address our prior on recommendations. 1 We monitored IRS’s release of
guidance (including frequently asked questions and notices) and other
communications to taxpayers and their representatives (such as IRS.gov
and tips for tax preparers). We also reviewed revisions to employment tax
forms and instructions.

We analyzed IRS data, as of September and October 2021, on Form
7200, Advance Payment of Employer Credits Due to COVID-19,
processing and rejections. We also reviewed IRS internal guidance
describing the implementation methods and procedures for the tax
provisions. We interviewed representatives from two payroll and one tax
professional group to obtain feedback on their experiences with IRS’s
implementation of the employer tax provisions. We selected these groups
because of their membership sizes and their members’ roles with filing
employment tax returns. We also interviewed IRS officials to discuss
implementation processes and statutory changes.

Objective 2
Characteristics of Credit To describe the credit claimants, we analyzed IRS data from Form 941,
Claimants and Deferral Employer’s Quarterly Federal Tax Return; Form 943, Employer’s Annual
Federal Tax Return for Agricultural Employees; Form 944, Employer’s
Users
Annual Federal Tax Return, adjusted employment tax returns; and Form

1See GAO, COVID-19: Continued Attention Needed to Enhance Federal Preparedness,
Response, Service Delivery, and Program Integrity, GAO-21-551 (Washington, D.C.: July
10, 2021); COVID-19: Sustained Federal Action Is Crucial as Pandemic Enters Its Second
Year, GAO-21-387 (Washington, D.C.: Mar. 31, 2021); Urgent Actions Needed to Better
Ensure an Effective Federal Response, GAO-21-191 (Washington, D.C.: Nov. 30, 2020);
Opportunities to Improve Federal Response and Recovery Efforts, GAO-20-625
(Washington, D.C.: June 25, 2020).

Page 43 GAO-22-104280 COVID 19
Appendix I: Objectives, Scope, and
Methodology

1040, Individual Income Tax Return, Schedule 3. 2 Third-party payers,
such as payroll companies filing returns on behalf of many clients, use
Schedule R, 941)

Allocation Schedule for Aggregate Form 941 Filers, to allocate their
clients’ dollar amounts for each line on Form 941 or 943. We included
data on the individual employers listed on Schedule R, with the exception
of the paper Schedule Rs submitted by Form 943 filers, as those lines are
not keyed into IRS’s data systems. 3

An IRS official said the agency finished entering information from Forms
941, 943, and 944 for 2020 into IRS’s data systems on December 14,
2021. IRS stores each form’s data in a different system. Thus, the dates
covered are different for each form (see table 9). We include 2021
employment tax return data, reported separately, for the returns that were
in IRS’s systems as of January 2022.

Table 9: Tax Returns Analyzed

Date of data
Return E-file Paper
Form 941 January 15, 2022 January 9, 2022
Schedule R January 15, 2022 January 18, 2022
Form 943 January 9, 2022 January 9, 2022
Form 944 January 9, 2022 January 9, 2022
Form 1040, Schedule 3 December 30, 2021 December 30, 2021
Adjusted returns Forms 941-X N/A, all returns are paper November 25, 2021
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104280

The dollar figures we are reporting are subject to taxpayer reporting error.
We report what was filed without adjustments. So, these figures may
differ from figures reported by IRS. For data from adjusted returns, such
as Form 941-X, we analyzed account transaction codes and credit
reference numbers to identify employers that received an ERC. Unlike

2Self-employed individuals file for their leave credits and report payroll tax deferrals on
their income tax return. Certain employers also claim COVID-19-related credits on Form
CT-1, Employer’s Annual Railroad Retirement Tax Form. We did not include these filers in
our review.
3Only 15 Forms 943 in our data that had an accompanying Schedule R.

Page 44 GAO-22-104280 COVID 19
Appendix I: Objectives, Scope, and
Methodology

taxpayer-provided data on employment tax returns, these codes reflect
actions on the employer’s account.

We obtained additional descriptive information on employers by matching
employer identification numbers with data in IRS’s Business Master File.
We identified the industry sectors associated with the employers through
the North American Industry Classification System (NAICS) codes that
employers reported on returns. 4 The NAICS has a hierarchical structure
and the codes contain six digits. The first two digits designate the NAICS
sectors—such as Manufacturing or Construction—that represent general
categories of economic activities. NAICS classifies all economic activities
into 20 sectors. The third digit represents the subsector.

The total values, by provision, in our analyses of NAICS sectors and
subsectors may be less than the totals we present for all credits and
deferrals for a sector. Our summary totals for the provisions include the
following items which are not included in our NAICS analyses:

• Leave credit and deferral data from self-employed individuals, which
would require additional analysis using Social Security numbers.
• Counts that were too small to analyze because of taxpayer privacy
considerations.
Taxpayers report NAICS codes and therefore they are subject to error, as
identified in previous IRS research. 5 Of the employers who used the ERC,
leave credits, or payroll tax deferrals, between about 4.5 and 8 percent
had neither a NAICS code on file nor a valid number. The blank codes
could be from new employers that had yet to file income tax returns with a
code. Blank codes could also be taxpayer errors.

In prior work we used information from the 2020 Bureau of Labor
Statistics’ Business Response Survey to identify six “hardest-hit” sectors,
or sectors that were most likely to experience adverse effects to business

4NAICS is the standard used by federal statistical agencies in classifying business
establishments for the purpose of collecting, analyzing, and publishing statistical data
related to the U.S. business economy. On corporate income tax returns, taxpayers are
instructed to determine from a provided list which business activity from which the
company derives the largest percentage of its total receipts. This list is based on the
NAICS.
5For example, in 2019 IRS summarized its research on NAICS error rates and how well
business descriptions from tax returns matched NAICS code descriptions.

Page 45 GAO-22-104280 COVID 19
Appendix I: Objectives, Scope, and
Methodology

operations as a result of the pandemic. 6 These six sectors are (1)
Accommodation and Food Services; (2) Arts, Entertainment, and
Recreation; (3) Educational Services; (4) Health Care; (5) Manufacturing;
and (6) Retail Trade.

To identify these six, we ranked sectors based on the following four
adverse effects to business operations, expressed in survey responses,
of resulting from the pandemic: (1) shortage of supplies or inputs, (2)
decrease in demand for products or services, (3) difficulty in moving or
shipping goods, and (4) government-mandated closure of a business
location. Of those four, we consider a decrease in demand for products or
services and a government-mandated closure of a business location as
adverse effects that are more likely to affect employment. We also used
the Bureau of Labor Statistics’ data on employee numbers by sector for
2019 and 2020 (not seasonally adjusted) from the Current Employment
Statistics Survey.

We also used Business Master File data on filing requirements and
employment codes to categorize employers by type. 7 Filing requirements
indicate which type of tax returns the employer is responsible for filing.
They also indicate whether an employer is a corporation or tax-exempt
organization. Employment codes identify other entities—such as state
and local government agencies—which do not have income tax filing
requirements. To categorize the employers, we had to make certain
assumptions which make the analysis imperfect. We consulted with IRS
about how to best categorize employers with more than one filing
requirement. For example, for employers with a filing requirement for both
a corporate income tax form and a tax-exempt organization information
return, we categorized the employers as tax-exempt organizations.

We obtained payroll tax deferral repayment data from IRS officials as of
December 31, 2021.

We also reviewed a research paper that used Form 941 data to estimate
usage and take-up rates from 2020 and 2021 for each of the provisions,

6See GAO, Paycheck Protection Program: Program Changes Increased Lending to the
Smallest Businesses and Underserved Locations, GAO-21-601 (Washington D.C.: Sept.
21, 2021).
7We analyzed account data for the employer identification numbers of employment tax
return filers, we did not match information on employment tax returns with other forms.

Page 46 GAO-22-104280 COVID 19
Appendix I: Objectives, Scope, and
Methodology

including an analysis of NAICS sectors. 8 When considering differences in
our methodologies and forms included in the analysis, we found that our
analyses were generally in agreement. 9 We assessed the reliability of
employment tax, Form 1040, and Business Master File data by reviewing
relevant documentation, reviewing written responses from knowledgeable
IRS officials, and electronically testing the data to identify obvious errors
or outliers. We determined that the data used in our analysis were
sufficiently reliable for the purpose of describing employers using the tax
credits and payroll tax deferrals.

Employer Experience with We interviewed representatives and members from tax preparation and
the Credits and Deferrals payroll industry groups and representatives from business groups to
discuss their experiences filing for the tax credits, and the usefulness of
the credits and deferrals in retaining employees and continuing
operations. We selected one tax preparer and two payroll professional
groups based on their size and the role of their professionals in filing
employment tax returns. We met with group representatives and
professional members of the groups. 10 Two of these groups also provided
us with email feedback from some of their members that work with
employment tax issues. We selected business groups that represent
small businesses and certain demographic groups. We met with
representatives from 11 business groups and members from one other
business group. The interviews and emails provided anecdotal
information that is not representative or generalizable to all professionals
or groups.

Objective 3
IRS Compliance Planning To evaluate IRS’s plans and actions to identify compliance risks we
analyzed a variety of agency documents. These documents include
compliance and implementation plans, Internal Revenue Manual sections,
desk guides and other procedures, and draft filters. We compared IRS

8Goodman, Lucas, Take-up of Payroll Tax-Based Subsidies During the COVID-19
Pandemic, (Washington, D.C.: Nov. 8, 2021).
9The research paper estimated values for paper returns that are still in processing and did
not include annual returns. For 2020 data, our data on ERC and deferral dollars were
slightly lower given the methodology in the paper. Our data on leave credits were slightly
higher, which we attributed to how the paper’s modeling may have treated outlier values.
10For example, we met with groups that represent small businesses and self-employed
individuals generally, and groups that represent women, Black, Hispanic, Asian, and
Native American small business owners.

Page 47 GAO-22-104280 COVID 19
Appendix I: Objectives, Scope, and
Methodology

documents with eligibility requirements for the tax credits, found in
legislation, and with selected project management practices. 11 For the
selected project management practices, we reviewed A Guide to the
Project Management Body of Knowledge (PMBOK® Guide), which
consists of 13 sections. We determined that there are three sections
containing a total of 13 subsections that are relevant. The three relevant
sections include project integration management, project schedule
management, and project stakeholder management. We selected the
practices based on their relevance to IRS’s identified compliance risks for
employer tax credits. We discussed IRS’s procedures and plans with IRS
officials in interviews.

We also used Business Master File and employment tax data to analyze
employers that may have been newly created to claim invalid tax credit
refunds. We reviewed employers that were established in or after April
2020, filed for a credit refund in second quarter 2020, and then stopped
filing a Form 941.

We interviewed IRS employees to discuss their experience with
implementing compliance procedures related to the COVID-19-related
provisions. Based on IRS documentation, we selected five processes
from different IRS divisions related to reviewing the ERC and leave
credits. When necessary, we considered office locations and randomly
selected employees to participate in interviews to discuss their work, IRS
guidance and training, compliance issues, and other topics. We used
these interviews to understand IRS’s processes and to identify
challenges.

Testing IRS Controls on To test controls over ERC, leave credit, and related advance credit
Credit Disbursements transactions, we selected three generalizable random attribute samples of
credits that IRS processed between April 16, 2020, and February 27,
2021. Each sample was planned with a tolerable error of 5 percent and
an expected error of 1 percent at a 95 percent confidence level.
Additionally, we tested all outlier transactions related to the ERC, leave
credits, and advance credits. The outliers consisted of dollar amounts
greater than $10 million and $7 million respectively (see table 10).

11Project management practices are 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
Project Management Institute is a not-for-profit association that provides global standards
for, among other things, project and program management.

Page 48 GAO-22-104280 COVID 19
Appendix I: Objectives, Scope, and
Methodology

Table 10: Population, Sample Size, and Outliers Selected for Review

Population transaction
COVID-19 employer credit type count Population dollar amount Sample size
Sample and population sizes
Employee Retention Credit 70,185 $2,274,805,883.19 93
Paid Sick and Family Medical Leave Credit 50,893 $939,367,336.17 93
Advanced Credit 10,476 $380,051,114.87 93
Outliers identified for review
Employee Retention Credit Outliers 18 $500,427,630.72 18
Sick and Family Leave Credit Outliersa ----- ----- -----
Advance Credits Outliers 10 $159,494,675.02 10
Source: GAO. | GAO-22-104280
a
We are not reporting the number and amount of outliers for the sick and family leave credits because
the small cell counts could constitute a disclosure of taxpayer information.

To determine whether IRS designed and implemented internal controls
related to the disbursement of the COVID-19 employer credits, we
obtained and reviewed IRS internal documentation for each sample
transaction to determine whether

• each COVID-19 tax credit was accurately recorded to the taxpayers’
module;
• duplicate credits were issued;
• the employer credits were offset to outstanding liability before the
refund was disbursed; and
• IRS reconciled any advance credits claimed on Form 7200 with the
taxpayer’s filed Form 941.
We also obtained and reviewed external documentation such as tax
returns related to each sample transaction to determine whether: (1) the
information from the tax return matched the taxpayer’s module records;

Page 49 GAO-22-104280 COVID 19
Appendix I: Objectives, Scope, and
Methodology

(2) the COVID-19 tax credits were calculated correctly; and (3) the
taxpayers were eligible to receive the tax credit. 12

12The tax returns included copies of 2020 Form 7200, Advance Payment of Employer
Credits Due to COVID-19 and Form 941. For employer credits’ claimed on Form 941 we
computed the COVID-19 tax credit using the Worksheet 1, Credit for Qualified Sick and
Family Leave Wages and the Employee Retention Credit, and the information reported on
the taxpayer’s return. The leave credits had limitations on the number of employees the
employer can have (less than 500 employees). The ERC had limitations on the dollar
amount per employee for which a credit could be claimed. However, we were only able to
determine the eligibility of leave credits for advance credits claimed on Form 7200 using
the number of employees the taxpayer reported on the tax return.

Page 50 GAO-22-104280 COVID 19
Appendix II: COVID-19-Related Tax Credits Appendix II: COVID-19-Related Tax Credits and
Payroll Tax Deferrals by Industry Sector

and Payroll Tax Deferrals by Industry Sector

The tables below show industry sector data for the paid sick and family
leave credits (leave credits), Employee Retention Credit (ERC), and
payroll tax deferrals for 2020. The tables include the 20 sectors identified
in the North American Industry Classification System (NAICS). See
appendix I for details on our methodology.

The total values, by provision, in our analyses of NAICS sectors are less
than the totals we present in the report for all credits and deferrals. Our
summary totals in the report include the following items which are not
included in our NAICS analyses:

• Leave credit and deferral data from self-employed individuals reported
on income tax returns, as this would require additional analysis using
Social Security numbers.
• Counts that were too small to analyze because of taxpayer privacy
considerations.

Table 11: Paid Sick and Family Leave Credits, by Industry Sector, 2020

Average credit Number of “Hardest-hit”
North American Industry Classification Amount claimed per employer employers sector (check
System sector (dollars in millions) (dollars) claiminga for yes)
Professional, Scientific, and Technical Services 2,542 47,712 53,285
Manufacturing 1,069 21,148 50,561 
Health Care and Social Assistance 814 10,355 78,615 
Construction 748 13,653 54,772
Retail Trade 506 9,710 52,101 
Wholesale Trade 313 13,257 23,576
Other Services (except Public Administration) 294 8,412 34,982
Invalid 275 11,879 23,172
Accommodation and Food Services 266 6,420 41,441 
Administrative and Support and Waste 248 12,174 20,347
Management and Remediation Services
Finance and Insurance 177 13,040 13,541
Real Estate and Rental and Leasing 170 9,174 18,536
Transportation and Warehousing 153 10,925 14,042
Educational Services 147 14,009 10,529 
Agriculture, Forestry, Fishing and Hunting 80 10,383 7,707
Arts, Entertainment, and Recreation 69 10,152 6,775 
Information 56 11,790 4,719
Mining, Quarrying, and Oil and Gas Extraction 42 22,118 1,920

Page 51 GAO-22-104280 COVID 19
Appendix II: COVID-19-Related Tax Credits and
Payroll Tax Deferrals by Industry Sector

Average credit Number of “Hardest-hit”
North American Industry Classification Amount claimed per employer employers sector (check
System sector (dollars in millions) (dollars) claiminga for yes)
Management of Companies and Enterprises 42 19,099 2,195
Utilities 11 19,633 552
Public Administration 4 22,952 183
Total 8,027 15,629 513,619
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104280

Notes: Dollar figures and sector information we are reporting are as reported by taxpayers and are
subject to taxpayer reporting error. These figures may differ from IRS’s reported figures because we
are reporting what was filed without adjustments. The table includes: 2020 Forms 941 (data on first
through fourth quarters 2020), 943, and 944 data as of January 2022. We did not include leave
credits for self-employed individuals in this analysis. Sectors are based on the North American
Industry Classification System. In prior work we used information from the 2020 Bureau of Labor
Statistics’ Business Response Survey to identify six “hardest-hit” sectors, or sectors that were most
likely to experience adverse effects to business operations as a result of the pandemic. See
GAO-21-601.
a
This column shows the number of unique employers who claimed a credit. Employers claiming
credits on more than one Form 941 are counted once. The numbers in this column do not equal the
total because we had to exclude some data from the sector rows to protect taxpayer privacy.

Table 12: Employee Retention Credits, by Industry Sector, 2020

Number of “Hardest-hit”
North American Industry Classification Amount claimed Average credit per employers sector (check
System sector (dollars in millions) employer (dollars) claiminga for yes)
Accommodation and Food Services 1,481 90,298 16,398 
Retail Trade 1,345 117,827 11,412 
Manufacturing 1,190 250,440 4,751 
Transportation and Warehousing 851 272,095 3,126
Arts, Entertainment, and Recreation 740 157,608 4,692 
Professional, Scientific, and Technical 737 56,708 13,000
Services
Health Care and Social Assistance 652 62,224 10,480 
Administrative and Support and Waste 527 130,008 4,057
Management and Remediation Services
Other Services (except Public Administration) 345 26,149 13,195
Information 327 209,789 1,558
Educational Services 323 135,148 2,392 
Wholesale Trade 294 75,013 3,924
Invalid 294 31,484 9,343
Construction 235 22,980 10,221
Finance and Insurance 229 94,359 2,422
Management of Companies and Enterprises 191 353,509 541

Page 52 GAO-22-104280 COVID 19
Appendix II: COVID-19-Related Tax Credits and
Payroll Tax Deferrals by Industry Sector

Number of “Hardest-hit”
North American Industry Classification Amount claimed Average credit per employers sector (check
System sector (dollars in millions) employer (dollars) claiminga for yes)
Real Estate and Rental and Leasing 164 31,884 5,152
Agriculture, Forestry, Fishing and Hunting 51 22,032 2,323
Mining, Quarrying, and Oil and Gas 39 88,688 436
Extraction
Utilities 13 175,458 72
Public Administration 0 0 0
Total 10,029 83,876 119,573
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104280

Notes: Dollar figures and sector information we are reporting are as reported by taxpayers and are
subject to taxpayer reporting error. These figures may differ from IRS’s reported figures because we
are reporting what was filed without adjustments. The table includes: 2020 Forms 941 (data on first
through fourth quarters 2020), 943, and 944 data as of January 2022. Sectors are based on the North
American Industry Classification System. In prior work we used information from the 2020 Bureau of
Labor Statistics’ Business Response Survey to identify six “hardest-hit” sectors, or sectors that were
most likely to experience adverse effects to business operations as a result of the pandemic. See
GAO-21-601.
a
This column shows the number of unique employers who claimed a credit. Employers claiming
credits on more than one Form 941 are counted once. The numbers in this column do not equal the
total because we had to exclude some data from the sector rows to protect taxpayer privacy.

Table 13: Payroll Tax Deferrals, by Industry Sector, 2020

Payroll tax Average deferral “Hardest-hit”
North American Industry Classification System deferred (dollars per employer Percentage of sector (check
sector in billions) (dollars) employers usinga for yes)
Manufacturing 20.7 1,161,930 6.8 
Professional, Scientific, and Technical Services 15.6 530,546 3.2
Health Care and Social Assistance 14.7 517,892 4.3 
Retail Trade 11.1 837,771 1.9 
Invalid 7.5 481,887 3.8
Administrative and Support and Waste 7.1 784,739 3.1
Management and Remediation Services
Transportation and Warehousing 5.6 1,082,708 2.3
Finance and Insurance 5.1 740,530 2.9
Information 5.1 882,906 6.1
Wholesale Trade 4.5 547,329 3.2
Construction 3.7 330,213 1.4
Other Services (except Public 3.5 319,428 1.4
Administration)
Educational Services 3.3 1,051,881 3.1 

Page 53 GAO-22-104280 COVID 19
Appendix II: COVID-19-Related Tax Credits and
Payroll Tax Deferrals by Industry Sector

Payroll tax Average deferral “Hardest-hit”
North American Industry Classification System deferred (dollars per employer Percentage of sector (check
sector in billions) (dollars) employers usinga for yes)
Management of Companies and 2.3 835,711 13.9
Enterprises
Accommodation and Food Services 2.0 136,501 2.7 
Real Estate and Rental and Leasing 1.9 246,452 2.0
Public Administration 1.9 42,618,173 1.3
Utilities 1.4 2,812,770 7.9
Arts, Entertainment, and Recreation 0.8 181,592 2.7 
Mining, Quarrying, and Oil and Gas 0.8 715,647 4.5
Extraction
Agriculture, Forestry, Fishing and 0.3 216,879 0.8
Hunting
Total 118.7 602,923 2.8
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104280

Notes: Dollar figures and sector information we are reporting are as reported by taxpayers and are
subject to taxpayer reporting error. The table includes: 2020 Forms 941 (data first through fourth
quarters 2020), 943, and 944 data as of January 2022. We did not include deferrals for self-employed
individuals in this analysis. Sectors are based on the North American Industry Classification System.
In prior work we used information from the 2020 Bureau of Labor Statistics’ Business Response
Survey to identify six “hardest-hit” sectors, or sectors that were most likely to experience adverse
effects to business operations as a result of the pandemic. See GAO-21-601.
a
This calculation is based on the total number of deferrals reported by an employer with a unique
employer identification number on Forms 941, 943, and 944, and the total number of filers of these
forms, by sector.

Page 54 GAO-22-104280 COVID 19
Appendix III: COVID-19-Related Tax Credits
Appendix III: COVID-19-Related Tax Credits
and Payroll Tax Deferral, Additional Data for

and Payroll Tax Deferral, Additional Data for
Selected Sectors

Selected Sectors
The figures below show the usage of the sick and family leave credits
(leave credits), Employee Retention Credit, and payroll tax deferrals for
the six “hardest-hit” sectors, and other sectors that appear in the top five
highest users, in dollars, for any of the three provisions. 1 For the sectors
that have subsectors in the North American Industry Classification
System (NAICS), we show usage for all or top subsectors.

The total values, by provision, in our analyses of NAICS subsectors may
be less than the totals we present for all credits and deferrals for a sector.
Our summary totals for the provisions include the following items which
are not included in our NAICS analyses:

Figure 4: Accommodation and Food Service Sector Employee Retention Credits, Leave Credits and Payroll Tax Deferrals,
2020

1These six sectors are (1) Accommodation and Food services; (2) Arts, Entertainment,
and Recreation; (3) Educational services; (4) Health Care; (5) Manufacturing; and (6)
Retail Trade. See appendix I for more information and GAO, Paycheck Protection
Program: Program Changes Increased Lending to the Smallest Businesses and
Underserved Locations, GAO-21-601 (Washington D.C.: Sept. 21, 2021).

Page 55 GAO-22-104280 COVID 19
Appendix III: COVID-19-Related Tax Credits
and Payroll Tax Deferral, Additional Data for
Selected Sectors

employed individuals, data from December 2021. The percentages by subsector may not total 100
due to rounding and exclusions of subsector data that were too small to protect taxpayer privacy.
Sectors are based on the North American Industry Classification System.

Figure 5: Administrative and Support and Waste Management and Remediation Services Sector Employee Retention Credits,
Leave Credits and Payroll Tax Deferrals, 2020

Page 56 GAO-22-104280 COVID 19
Appendix III: COVID-19-Related Tax Credits
and Payroll Tax Deferral, Additional Data for
Selected Sectors

Figure 6: Arts, Entertainment, and Recreation Sector Employee Retention Credits, Leave Credits and Payroll Tax Deferrals,
2020

Figure 7: Construction Sector Employee Retention Credits, Leave Credits, and Payroll Tax Deferrals, 2020

Page 57 GAO-22-104280 COVID 19
Appendix III: COVID-19-Related Tax Credits
and Payroll Tax Deferral, Additional Data for
Selected Sectors

Figure 8: Educational Services Sector Employee Retention Credits, Leave Credits, and Payroll Tax Deferrals, 2020

Page 58 GAO-22-104280 COVID 19
Appendix III: COVID-19-Related Tax Credits
and Payroll Tax Deferral, Additional Data for
Selected Sectors

Figure 9: Health Care and Social Assistance Sector Employee Retention Credits, Leave Credits, and Payroll Tax Deferrals,
2020

Figure 10: Manufacturing Sector Employee Retention Credits, Leave Credits, and Payroll Tax Deferrals, 2020

Page 59 GAO-22-104280 COVID 19
Appendix III: COVID-19-Related Tax Credits
and Payroll Tax Deferral, Additional Data for
Selected Sectors

through fourth quarters 2020), 943, and 944, data as of January 2022; and Form 1040 data for self-
employed individuals, data from December 2021. Percentages by subsector may not total 100 due to
rounding and exclusions of subsector data that were too small to protect taxpayer privacy. Sectors
are based on the North American Industry Classification System.

Figure 11: Professional, Scientific, and Technical Services Sector Employee Retention Credits, Leave Credits, and Payroll Tax
Deferrals, 2020

Page 60 GAO-22-104280 COVID 19
Appendix III: COVID-19-Related Tax Credits
and Payroll Tax Deferral, Additional Data for
Selected Sectors

Figure 12: Retail Trade Employee Retention Credits, Leave Credits, and Payroll Tax Deferrals, 2020

Figure 13: Transportation and Warehousing Sector Employee Retention Credits, Leave Credits, and Payroll Tax Deferrals,
2020

Page 61 GAO-22-104280 COVID 19
Appendix III: COVID-19-Related Tax Credits
and Payroll Tax Deferral, Additional Data for
Selected Sectors

due to rounding and exclusions of subsector data that were too small to protect taxpayer privacy.
Sectors are based on the North American Industry Classification System.

Page 62 GAO-22-104280 COVID 19
Appendix IV: Comments from the Internal
Appendix IV: Comments from the Internal
Revenue Service

Revenue Service

Page 63 GAO-22-104280 COVID 19
Appendix IV: Comments from the Internal
Revenue Service

Page 64 GAO-22-104280 COVID 19
Appendix IV: Comments from the Internal
Revenue Service

Page 65 GAO-22-104280 COVID 19
Appendix IV: Comments from the Internal
Revenue Service

Page 66 GAO-22-104280 COVID 19
Appendix IV: Comments from the Internal
Revenue Service

Page 67 GAO-22-104280 COVID 19
Appendix V: GAO Contacts and
Appendix V: GAO Contacts and
Acknowledgments

Acknowledgments

Jessica Lucas-Judy, (202) 512-6806, lucasjudyj@gao.gov
GAO Contacts Cheryl E. Clark, (202) 512-3406, clarkce@gao.gov

In addition to the contacts named above, Brian K. James (Assistant
Staff Director), Nina E. Crocker (Assistant Director), Lindsay Swenson
Acknowledgments (Analyst-in-Charge), Austin Barvin, Michael Bechetti, Garry Blum, Kareen
Borhaug, Sharon Byrd, Allison Channell, Liliam Coronado, Alejandro
Coste Sanchez, Sara Daleski, David Dornisch, Steven Flint, Robert
Gebhart, Shelby Kain, Michael Kany, Yoki Moody Wong, Edward
Nannenhorn, Sonya Phillips, Samantha Piercy, Julie Scarano, Andrew J.
Stephens, and Monasha Thompson made key contributions to this report.

(104280)
Page 68 GAO-22-104280 COVID 19
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