For the first time since 2020, we have some meaningful insight into how the Coronavirus Aid, Relief, and Economic Security (CARES) Act payroll tax deferrals played out—and the picture is mixed. The Treasury Inspector General for Tax Administration (TIGTA) released a report on August 27, 2025, evaluating the Internal Revenue Service’s (IRS) handling of deferred Social Security taxes under the CARES Act. The report provides important insights into employer compliance, IRS administrative processes, and the accuracy of penalties assessed in connection with these deferrals.  

While the program provided short-term relief for many businesses, unclear rules at the outset translated into confusion, missteps, and in some cases, harsh IRS penalties. Most taxpayers repaid the deferred taxes on time. For the roughly 2% of taxpayers who did not (or who did, but the IRS accounting remains incorrect), the fallout has resulted in significant tax liabilities. Those 167,000 employers need to either (a) reconcile their payments to resolve IRS errors, or (b) negotiate an installment agreement to resolve the outstanding balance due. 

Background on Deferrals 

The CARES Act authorized employers and self-employed individuals to defer payment of certain Social Security taxes for wages paid between March 27 and December 31, 2020. Deferred amounts were required to be repaid in two installments— the first half by December 31, 2021, and the second half by December 31, 2022. To administer this program, the IRS intended to place temporary credits on taxpayer accounts, and then reverse those credits as payments were received. Where deferred amounts went unpaid, the IRS subjected the balances to strict penalties (10% of the entire amount deferred, regardless of the amount of the unpaid balance) and interest, as well as standard collection procedures. 

TIGTA Findings  

TIGTA’s report indicates that 98% of employers complied with the CARES Act rules. Approximately 1.1 million employers deferred $133 billion in Social Security taxes, with approximately $131 billion repaid as of July 2024. The $2 billion in unpaid taxes is tied to approximately 167,000 employers.  

The report identified several administrative issues, which likely affected compliance, including: (1) processing delays (10,000 accounts still awaited manual adjustment as of May 2025), (2) errors in the manual handling of credits and reversals, and (3) erroneous penalty assessments.  

The last issue, errors in penalty assessments, is still a substantial problem. TIGTA found that 9,548 business accounts were incorrectly assessed Failure to Deposit (FTD) penalties totaling $73.7 million. In these cases, the 10% penalties were assessed before payments or credits posted to the account. The IRS lacks an automated process to adjust the penalties, and the manual corrections are haphazard, at best. 

Funding Implications 

Employers who timely paid the deferred amounts may be subject to erroneous penalties or overstated balances, while employers who did not repay timely are left with outstanding tax liabilities. As TIGTA noted, the outstanding balances, correct or not, subject the employer to the IRS’s standard collection processes, including the filing of a federal tax lien. For lenders funding employer-customers with a tax liability, the federal tax lien can adversely affect the lender’s priority and/or security in its customer’s assets as well as the funding relationship itself.  

For businesses with incorrect penalty assessments, the solution is to proactively reach out to the IRS to reconcile the payments and credits. IRS officials, in response to the TIGTA audit, stated that current agency processes do not require manually assessed penalties to be adjusted when a systemic credit posts to a tax account. Because there is no systemic fix and correcting the problem requires manual reconciliations, which are subject to human error, the transactions are frequently incorrect. Rather than rely on the IRS to fix the issue, employers (or their representatives) should contact the IRS to recalculate or abate the penalties.  

For businesses with liabilities, the solution is to proactively reach out to the IRS to negotiate an installment agreement and subordination of federal tax lien. In the face of administrative delays, posting errors, and evolving compliance requirements, employers (or their representatives) can rely on these longstanding remedies to provide a measured and reliable framework for addressing liabilities and preserving funding relationships.