On October 19, 2023, the IRS announced a process which is intended to allow employers who were pressured or misled by marketers or promoters into filing ineligible claims for the Employee Retention Credit (ERC), but who have not yet received a refund, to withdraw their claim. This process permits employers whose ERC claims are still being processed to withdraw their refund claims and avoid the potential that the IRS would deny the claim after the credit is received, thus avoiding the need to repay any refunded amounts, and avoiding potential interest and penalties.
When properly claimed, the ERC is a refundable tax credit designed for employers that were fully shut down or partially suspended due to the COVID-19 pandemic or that had a significant decline in gross receipts during the eligibility periods.
The move to permit the withdrawal of claims comes after the IRS placed abusive ERC promotions on its Dirty Dozen, an annual list aimed at helping raise awareness to protect honest taxpayers from aggressive promoters and con artists. After placing abusive ERC promotions on the Dirty Dozen, on September 14, 2023, the Commissioner of the IRS ordered that processing of any new ERC claims be stopped until December 31, 2023. However, the IRS stated that it would continue to process and pay out previously filed eligible ERC claims, as well as audit ERC claims and pursue criminal investigations of promoters and businesses filing dubious claims.
Who Can Withdraw an ERC Claim
To be eligible to withdraw an ERC claim, an employer must meet all of the following criteria:
- The ERC must have been claimed using an adjusted employment return, i.e. Forms 941-X, 943-X, 944-X, or CT-1X
- The ERC must be the only adjustment claimed on the return
- The employer must withdraw the entire amount of the ERC claim (this refers to each calendar quarter, rather than all calendar quarters, for which an ERC claim was made)
- The ERC claim cannot have been paid by the IRS or, if it has been paid, the employer has not yet cashed or deposited the refund check
How to Withdraw an ERC Claim
The notice provides a step-by-step menu for withdrawing a claim. If the employer filed adjusted returns to claim ERCs for more than one calendar quarter and wishes to withdraw all ERC claims, it must follow the steps below for each calendar quarter for which it is requesting a withdrawal. The IRS also has a dedicated page with sample form, which can be found here.
Employers that have not received a refund and have not been notified their claim is under audit may request a withdrawal by following these steps:
- Make a copy of the adjusted return with the claim you wish to withdraw
- In the left margin of the first page, write “Withdrawn”
- In the right margin of the first page:
- Have an authorized person sign and date it
- Write their name and title next to their signature
- Fax the signed copy of your return using your computer or mobile device to the IRS’s ERC claim withdrawal fax line at 855-738-7609. The employer should keep a copy with its tax records. The notice even provides a template for a simple claim withdrawal request.
Employers that have not received a refund and have been notified of an audit can still withdraw ERC claims using the above procedure, but must check with their examiner about how to fax or mail the withdrawal request directly to the examiner or, if an examiner has not yet been assigned, should respond to the audit notice with the withdrawal request, using the instructions in the notice for responding.
Special instructions are also included in the notice for employers that have received a refund check but have not cashed or deposited it.
Once a withdrawal is submitted, the employer should expect to receive a letter from the IRS about whether their withdrawal request was accepted or rejected. A withdrawal is not effective until accepted by the IRS. If the IRS accepts the withdrawal, the employer may need to amend its income tax return (if it previously amended that return to reflect ERCs that had been claimed).
ERC Refunds Already Received
Employers that are not able use the above withdrawal process may still be able to file another adjusted return if they need to:
- Reduce the amount of their ERC claim
- Make other changes to their adjusted return
However, it should be noted that the IRS is also working on separate guidance for ineligible employers that were misled into making ERC claims and have already received the payment.
Continued Risk for Fraudulent Claims
Withdrawn ERC claims will be treated as if they were never filed and the IRS will not impose penalties or interest. However, ineligible employers should note that withdrawing an ERC claim will not remove the possibility that they or their advisor could be subject to potential criminal investigation or prosecution for filing a fraudulent ERC claim.