Emergency tax refunds meant to help businesses weather pandemic woes were significantly delayed because their applications got ensnared in the IRS paperwork backlog, according to a new Government Accountability Office report.
The holdup required the IRS to shell out tens of millions of dollars in interest on top of the refunds.
Businesses could apply for the refunds as part of the CARES Act and other Covid-19 relief laws Congress passed in 2020, allowing them to apply losses to prior-year profits known as carrybacks to generate refunds and to accelerate alternative minimum tax (AMT) credit refunds.
The idea was to help them get cash fast when facing liquidity shortages during the pandemic.
But the IRS took far longer than directed by Congress to process the paperwork, GAO found.
“IRS data show that the agency started to miss the 90-day statutory requirement for applications in September 2020 and missed it throughout 2021,” the report said.
Nearly six months: The average time for IRS to process all carryback refunds — applications for tentative refunds for net operating loss carrybacks and AMT credit refunds — was 165 days for individual filers and 166 days for corporate filers as of November 2021, according to GAO.
The IRS also reported that roughly 460 business filings from 2020 had not been entered into its processing systems as of November 2021.
The missed deadlines triggered about $61 million in interest payments on all carrybacks in fiscal year 2021, about 80 percent of which were for applications for tentative refunds.
Big buildup amid agency shutdown: IRS officials told GAO that the CARES Act changes led to 276 percent more filings for carryback refunds in fiscal 2021 than in fiscal year 2020.
From mid-spring to the summer of 2020, the IRS had shuttered much of its operations due to the pandemic and reassigned as many functions as possible to remote workers.
The IRS didn’t start to cut the carryback backlog until April 2021, seven months after the agency began missing its statutory requirement. From June to September 2021, the IRS started training additional staff to process carrybacks and GAO flagged the IRS for not acting swiftly enough despite such remedial actions.
A suggested fix: Setting up an average processing time threshold to trigger efforts to avoid missing refund deadlines might have helped, according to GAO, a recommendation the IRS didn’t agree or disagree with.
But the problem is persisting.
“Until effective preventative control activities and mitigation plans are put in place, IRS remains at risk of continuing to exceed its 90-day statutory requirement to issue tentative refunds for net operating loss carrybacks and AMT credit refunds,” GAO said.