Last month, citing “rising concerns about a flood of improper Employee Retention Credit (ERC) claims,” the IRS announced a moratorium on processing new ERC claims. At the time, the agency indicated that it was finalizing details for a withdrawal option for those who have filed an inappropriate ERC claim, but the claim has not been processed—an amnesty program, of sorts. Today, the IRS announced the details of the special withdrawal process.
Under the new withdrawal option, certain employers that have filed an ERC claim but have not received a refund can withdraw their submission and avoid future repayment, interest, and penalties. Employers that have submitted an ERC claim that’s still being processed can withdraw their claim and avoid the possibility of getting a refund for which they’re ineligible.
Why bite now? The IRS says withdrawn claims will be treated as if they were never filed. The IRS will not impose penalties or interest.
However, it’s not a panacea. The IRS says that it created the withdrawal option to help taxpayers who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Those taxpayers who willfully filed a fraudulent claim, or those who assisted or conspired to do so, should be aware that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.
“The IRS is committed to helping small businesses and others caught up in this onslaught of Employee Retention Credit marketing,” said IRS Commissioner Danny Werfel. “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.”
Here’s how the ERC works. Eligible employers are those that paid qualified wages to some or all employees after March 12, 2020, and before Jan. 1, 2022. Typically, to qualify, you must demonstrate that your business was shut down by a government order due to the pandemic during 2020 or the first three calendar quarters of 2021, or that you experienced a specific decline in gross receipts during the eligibility periods during 2020 or the first three calendar quarters of 2021. Some businesses may also qualify as recovery startup businesses for the third or fourth quarters of 2021 (otherwise, the ERC relief was phased out by Congress for businesses for that period).
The credit is 50% of up to $10,000 in wages, meaning that it can be as high as $5,000 per employee in 2020 and as high as $21,000 per employee in 2021 (totaling the $26,000 per employee that is regularly touted).
The ERC is available to most kinds of businesses, including tax-exempt businesses. It is not available to individuals, including freelancers and independent contractors.
Some additional restrictions apply. For example, businesses may not include wages funded by a Payroll Protection Program (PPP) forgivable loan (another Covid relief program) when calculating wages eligible for the ERC.
The IRS has created a chart to help a business or other organization quickly decide if they qualify for the ERC. While the IRS acknowledges that this is a very technical area of the law, they note that the chart includes the main eligibility factors. Taxpayers are encouraged to review IRS guidance and tools for helping determine ERC eligibility, including frequently asked questions and a new question-and-answer guide to help businesses understand if they are eligible for the credit.
More information is available on IRS.gov/erc.
If you realize that you should not have filed an ERC claim there’s now an ERC claim withdrawal process. You can participate if all of the following apply:
- You claimed the ERC on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X);
- You filed the adjusted return only to claim the ERC and made no other adjustments;
- You want to withdraw the entire amount of their ERC claim; and
- The IRS has not paid the claim, or the IRS has paid the claim, but you haven’t cashed or deposited the refund check.
If you made any other changes on the adjusted employment tax return or only need to reduce your ERC claim (not withdraw it entirely), you can’t use the withdrawal process—you need to amend your return. For more information, check out “Amending a return” (Q1 and Q2) on the ERC frequently asked questions page on the IRS website.
The withdrawal process depends on how the original claim was filed and where taxpayers might be in the process.
Taxpayers 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 taxpayer, depending on whether the taxpayer’s ERC claim was filed individually or batched with others.
Taxpayers who filed their ERC claims themselves, haven’t received, cashed, or deposited a refund check, and have not been notified their claim is under audit should make the request directly to the IRS. To do this:
- Make a copy of the adjusted return with the claim you wish to withdraw, and write “Withdrawn” in the left margin of the first page.
- In the right margin of the first page, have an authorized person sign and date it, and write their name and title next to their signature (see the illustration below).
- Fax the signed copy of your return to the ERC claim withdrawal fax line at 855.738.7609—this is a special IRS fax line to receive withdrawal requests and enables the agency to stop processing before the refund is approved (taxpayers who are unable to fax their withdrawal can mail their request, but this will take longer).
- Keep your copy with your tax records.
Taxpayers who have been notified they are under audit can send the withdrawal request to the assigned examiner or respond to the audit notice. To do this, prepare your ERC withdrawal request as above, but don’t fax or mail it to the withdrawal unit. Instead, if you’ve been assigned an examiner, communicate with your examiner about how to fax or mail your withdrawal request directly to them. Or, if you haven’t been assigned an examiner, respond to your audit notice with your withdrawal request, using the instructions in the notice for responding.
Taxpayers who received a refund check but haven’t cashed or deposited it can still withdraw their claim. You’ll still want to prepare the claim withdrawal request, but don’t fax it. Simply write “Void” in the endorsement section on the back of the refund check, and include a note that says, “ERC Withdrawal”—briefly explain the reason for returning the refund check—and mail those materials using a traceable method to Cincinnati Refund Inquiry Unit, PO Box 145500, Mail Stop 536G, Cincinnati, OH 45250. Don’t forget to make copies for your records.
For more information, taxpayers are urged to follow the special instructions at IRS.gov/withdrawmyerc.
The IRS will send a letter telling you whether your withdrawal request was accepted or rejected. It’s important to note that your approved request is only effective once you receive your IRS acceptance letter.
If your withdrawal is accepted, you may need to amend your income tax return.
The IRS will be hosting a one-hour webinar focusing on the ERC moratorium and withdrawing ERC claims. The webinar will be held on Thursday, November 2, 2023 (2:00 p.m. Eastern, 1:00 p.m. Central, 12:00 p.m. Mountain, 11:00 a.m. Pacific, 10:00 a.m. Alaska, 8:00 a.m. Hawaii). Bonus: tax professionals can earn up to 1 CE Credit. You need to register in advance, but if you can’t attend, there will be a recording.
The IRS has also issued a warning that marketers and scammers have revised their ERC pitches following the Sept. 14 moratorium announcement. Some are pushing employers who submit an ERC claim into agreeing to costly up-front loans in anticipation of a refund. The IRS urges taxpayers to avoid these loans and also learn the warning signs of ERC scams. Some of those include:
- Aggressive marketing on radio, television and online—as well as phone calls and text messages.
- Direct mail. Some ERC mills are sending out fake letters to taxpayers from non-existent groups like the “Department of Employee Retention Credit.” These letters can look like official IRS correspondence or an official government mailing with language urging immediate action.
- Leaving out key details. Third-party promoters of the ERC often don’t accurately explain eligibility requirements or how the credit is computed. They may make broad arguments suggesting that all employers are eligible without evaluating an employer’s individual circumstances (I’ve noted this repeatedly on social media).
- The promoters may not inform taxpayers that they need to reduce wage deductions claimed on their federal income tax return by the amount of the ERC. This is a key detail that is being left out of these discussions. Legitimate tax pros have repeatedly recounted awkward conversations about the need to amend returns when businesses were not expecting to do so. This is a particular concern in a business “divorce”—we’re already seeing this play out in real time.
- Payroll Protection Program participation. Many promoters don’t tell employers that they can’t claim the ERC on wages reported as payroll costs for purposes of PPP.
The IRS reminds those being approached by these promoters that there are simple steps that can be taken to protect themselves from making an improper ERC. Many of these are simply common sense. Their number one tip—and mine? Work with a trusted tax professional.
You should also request a detailed worksheet explaining ERC eligibility and the computations used to determine the ERC amount. Many of my colleagues have noted that when they’ve asked companies to secure this information from those promoters, the promoters have balked. That’s a clear red flag.
Finally, only apply if you believe you qualify. It’s not intended to be a “throw it against the wall and see if it sticks” credit—it’s a legitimate mechanism for providing relief to employers who kept their lights on during Covid. Don’t get caught up in a money grab that could backfire.