News, Articles & Resources

On October 19, 2023, the IRS announced the details of a special withdrawal process to help those who filed an Employee Retention Credit (ERC) claim and are concerned about its accuracy. The process has been announced as part of a larger effort to protect small businesses and organizations from scams, and allows certain employers that filed an ERC claim but have not yet received a refund to withdraw their submission and avoid future repayment, interest, and penalties. Employers that submitted an ERC claim that is still being processed can withdraw their claim and avoid the possibility of getting a refund for which they are ineligible.

The ERC is a refundable tax credit designed for businesses that continued paying employees during the COVD-19 pandemic while their business operations were fully or partially suspended due to a government order, or which had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals. The IRS has provided a checklist for employers who need help figuring out if they are eligible to claim the ERC.

Unfortunately, certain aggressive promoters encouraged employers to apply for the ERC, even if they were not eligible, with the promise of the employer receiving a large credit (and the promoter receiving a hefty fee for helping them submit the claim). Some employers and small businesses were persuaded to submit the claims, despite their ineligibility, unbeknownst to the employer.

The IRS, aware of these schemes, has warned employers of red flags to be aware of with respect to these promoters, and has shifted its focus to review ERC claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims. The IRS has stated it has hundreds of criminal cases being worked, and thousands of ERC claims have been referred for audit.

In providing for the withdrawal option for employers who may have been scammed, IRS Commissioner Danny Werfel stated: “The IRS is committed to helping small businesses and others caught up in this onslaught of Employee Retention Credit marketing. The aggressive marketing of these schemes has harmed well-meaning businesses and organizations, and some are having second thoughts about their claims. We want to give these taxpayers a way out. The withdrawal option allows employers with pending claims to avoid future problems, and we encourage them to closely review the withdrawal option and the requirements. We continue to urge taxpayers to consult with a trusted tax professional rather than a marketing company about this complex tax credit.”

The new withdrawal process follows the IRS’s announcement on September 14, 2023 of an immediate moratorium on processing new ERC claims. The moratorium will last until at least the end of 2023. Payouts for claims submitted before September 14, 2023 will continue during the moratorium but at a slower pace due to more detailed compliance reviews. As the IRS noted, “enhanced compliance reviews of existing claims submitted before the moratorium is critical to protect against fraud but also to protect businesses and organizations from facing penalties or interest payments stemming from bad claims pushed by promoters.”

Employers who request to withdraw their claim under this new procedure are asking the IRS not to process their entire adjusted employment tax return (Form 941-X, 943-X, 944-X, CT-1X) for the tax period that includes their ERC claim. Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose penalties or interest.

Details of the withdrawal process are as follows:

Who can ask to withdraw an ERC claim

Employers can use the ERC claim withdrawal process if all of the following apply:

• They made the claim on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X).
• They filed the adjusted return only to claim the ERC, and they made no other adjustments.
• They want to withdraw the entire amount of their ERC claim.
• The IRS has not paid their claim, or the IRS has paid the claim, but the employer has not yet cashed or deposited the refund check.

Employers who are not eligible to use the withdrawal process can reduce or eliminate their ERC claim by filing an amended return. For example, if the employer has made any other changes on the adjusted employment tax return or only needs to reduce their ERC claim (not withdraw it entirely), the employer must amend their return.

Further, for employers who willfully filed a fraudulent claim (or those who assisted in doing so), withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.

How to withdraw an ERC claim

The instructions for withdrawing an ERC claim are set forth in detail on the IRS website. Different steps will need to be followed depending on whether the employer has received a refund already and whether the employer has been notified their claim is under audit. The instructions are summarized below:

• Employers whose professional payroll company filed their ERC claim should consult with the payroll company. The payroll company may need to submit the withdrawal request for the employer, depending on whether the employer’s ERC claim was filed individually or batched with others.
• Employers who filed their ERC claims themselves, have not yet received, cashed, or deposited a refund check and have not been notified their claim is under audit should fax withdrawal requests to the IRS using a computer or mobile device. The IRS has set up a special fax line to receive withdrawal requests. This enables the agency to stop processing the claim before the refund is approved. Employers who are unable to fax their withdrawal using a computer or mobile device can mail their request, but this will take longer for the IRS to receive.
• Employers who have been notified they are under audit can send the withdrawal request to the assigned examiner or respond to the audit notice if no examiner has been assigned.

Employers who received a refund check, but have not yet cashed or deposited it, can still withdraw their claim. They should mail the voided check with their withdrawal request in accordance with the instructions on the IRS website.

After the withdrawal request is submitted

After the withdrawal request is submitted, the IRS will send the employer a letter to notify the employer whether the request was accepted or rejected. The request is not effective until the employer has received the acceptance letter from the IRS. If the withdrawal request is accepted, the employer may need to amend their income tax return.

Upcoming ERC webinar

Tax professionals and others can register for an IRS webinar on November 2, 2023. The webinar will cover the moratorium, the withdrawal process, and other ERC resources, and will include a live question and answer segment.

IRS continues to pursue scammers

The IRS continues to warn taxpayers to use extreme caution before applying for the ERC. The IRS is also working on guidance to help employers that were misled into claiming the ERC and have already received the payment. More details should be available later this fall.