Every year the IRS National Taxpayer Advocate Service (TAS) issues its Annual Report to Congress that discusses the ten most serious issues taxpayers faced during the past year in their dealings with the IRS, among other topics. This year’s Report, released on January 8, 2025, raises several issues relating to the IRS’s internal workings, such as taxpayer service (number 4) and hiring challenges (number 6), while others are somewhat generic, such as tax-related scams (number 5) and tax literacy (number 8). Several of the issues are important to employers and employment taxes.

Employee Retention Credit: First on the TAS list is the employee retention credit (ERC). Congress created the ERC in response to the COVID-19 pandemic as a way to support certain businesses and exempt organizations struggling with government closures and business downturns.¹ While the ERC changed a bit between 2020 and 2021, in general it afforded employers tax credits for wages paid to employees during these periods if certain conditions were met. However, as the Advocate noted:

Unfortunately, when Congress delivers relief through the tax code, scammers, and bad actors all too often take advantage hoping to illegally obtain large refunds or promoter fees. Specifically, in the case of the ERC, bad actors and scammers targeted desperate business owners using aggressive advertising campaigns that provided inaccurate or incomplete information regarding their eligibility for the credit.²

Due to what the IRS believed to be a high number of improper claims submitted by taxpayers, it implemented a moratorium on processing claims for the ERC on September 14, 2023, and has been slow to process claims ever since. Taxpayers have been frustrated by the IRS’s lack of information and transparency as to its plan for processing the remaining nearly 1.2 million claims as of October 26, 2024. The IRS has been pressed by various members of Congress about the ERC, but there are also mixed reactions to claims that were filed just before the expiring statute of limitations, particularly the concern that aggressive promoters were pushing fraudulent claims. As a result, many employers with valid claims have been waiting months or even years to receive their ERC, as the IRS seeks to sort out the difference between claims that are valid and those that are not. Indeed, the average number of days to process an ERC claim in 2024 reached 381 days.³ These delays have had real consequences for small businesses that needed those funds to stay operational, while others are concerned about cashing refunds for fear that they may be audited and have to repay them with penalties and interest.

The Advocate further criticized the IRS for a lack of transparency about processing claims, confusing and contradictory notices, and a general failure to follow standard audit procedures.⁴ The Advocate proposed a number of recommendations to speed up the processing of ERC claims and foster better communication and transparency.

Identity Theft: Third on the list is identity theft.⁵ While the Report is not focused on the issue from an employment law perspective, employers often hire employees only to discover later that they have used another individual’s social security number. Apart from immigration and employment law considerations, employers are faced with questions about whether they need to file amended quarterly payroll returns and amended W-2s (W-2c), and how to report such wages when they discover a social security number is invalid. While the IRS has provided informal guidance that employers should report using the number: 000-00-0000⁶ when they lack a valid social security number (SSN), many payroll systems reject it because 000-00-0000 is itself not a valid SSN. These kinds of problems are vexing to employers, cause considerable frustration, and are time-consuming and expensive to fix, particularly given that these are reporting and not tax withholding or deposit problems. More clarity and better guidance are needed from the IRS for employers faced with identity theft problems in the context of employment taxes.

ITIN Processing: Seventh on the list is also related to identity theft: the processing of individual taxpayer identification numbers (ITINs), which can include but are not limited to social security numbers (SSNs).⁷ An employer hiring a new employee in the United States who is not a citizen may apply for a SSN, but the processing time to receive it can be far longer than expected, which in turn creates the kind of reporting problems noted above when there is no valid SSN at the time wages need to be paid and reported. The lack of a SSN can also create issues with wage statements, as well as the amount of withholding. Issues can also arise when a settlement requires a wage payment to an individual who wants to provide an ITIN rather than a SSN.

Wages cannot be paid using an ITIN, and this again puts employers in the same position as having no valid SSN in the first place. While the Report again is not from the perspective of issues employers face, ITINs can present another set of problems for employers when dealing with making payments to employees.   

Employers need to remain vigilant about correct tax reporting for employees, but should also recognize that identity theft and proper SSN identification are employment issues as well. Use of the E-verify system for new hires is one way employers can try to reduce such problems, but it is not a guarantee that no issue will arise.  Employers faced with these problems should consult their employment, tax, and immigration counsel.