Key Takeaways:
- The IRS has created a withdrawal option for employers to avoid repayment, interest, and penalties from ineligible ERC claims.
- A moratorium on ERC filings is in place due to a surge of fraudulent and questionable claims.
- An increased compliance review process for existing claims is underway to protect businesses from potential bad advice pushed by promoters.
- Taxpayers who willfully filed fraudulent ERC claims should be aware that withdrawing the claim will not exempt them from criminal investigation.
- Eligible employers can use the withdrawal process if their adjusted employment claim was only made to secure an ERC, the IRS has not paid out/cashed the refund check, and they wish to withdraw the entire amount of their claim.
- Employers are strongly advised against entering into costly up-front loans due to promises of potential refunds from marketers and scammers.
- Contact your KRD advisor if you have questions about an ERC claim you filed or that has been filed on your behalf.
Withdrawals and Moratorium on New Claims Follows Flood of Fraudulent ERC Claims
The IRS has announced the creation of a special withdrawal process to help employers who filed an Employee Retention Credit (ERC) claim and are concerned about its accuracy.
This new withdrawal option 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’s still being processed can withdraw their claim and avoid the possibility of getting a refund for which they’re ineligible.
The IRS created the withdrawal option to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose penalties or interest.
However, taxpayers who have willfully filed fraudulent claims or conspired to do so should be aware that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.
If you have questions about an ERC claim you filed or that has been filed on your behalf, contact your KRD advisor.
Moratorium on New ERC Claims
The creation of the ERC withdrawal process follows the September 14, 2023, announcement of a moratorium on new ERC filings due to a surge of fraudulent and questionable claims. The moratorium is expected to extend at least through the end of this year.
The processing of ERC claims already in progress when the moratorium was imposed is expected to be slowed by increased IRS scrutiny, with the anticipated process extending to 180 days from the previous 90 days. The enhanced compliance review of existing claims is critical to protect against fraud but also to protect businesses from facing penalties or interest payments stemming from bad claims pushed by promoters, IRS Commissioner Danny Werfel said.
‘Substantial Share’ of Questionable Claims
Werfel ordered the moratorium amid growing concerns that a substantial share of new ERC claims are ineligible and increasingly putting at financial risk businesses that are being pressured and scammed by aggressive promoters and marketing.
When properly claimed, the ERC – also referred to as the Employee Retention Tax Credit or ERTC – is a refundable tax credit designed for businesses that continued paying employees during the Covid-19 pandemic while their business operations were fully or partially suspended due to a government order, or they had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals. The IRS has received approximately 3.6 million ERC claims over the course of the program
Since the program ended in late 2021, businesses have been able to apply retroactively for the ERC if they didn’t utilize the program at the time they were eligible, but the statutes of limitations for capturing those tax credits will start in 2024, meaning the window will close on the program.
Promoters have begun aggressively marketing to business owners to apply for the ERC, and are charging them fees based on a percentage of the tax credits they recover. But thousands of claims coming through these promoters have proven to be either fraudulent or ineligible. As of July 31, 2023, IRS Criminal Investigations (IRS-CI) had initiated 252 investigations involving over $2.8 billion of potentially fraudulent ERC claims.
Marketers and scammers have already revised their ERC pitches following the September 14 moratorium announcement, with some 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.
Who Can 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 they haven’t cashed or deposited the refund check.
Taxpayers who are not eligible to use the withdrawal process can reduce or eliminate their ERC claim by filing an amended return. For details, see the Correcting an ERC claim – Amending a return section of the frequently asked questions about the ERC.
How to Withdraw an ERC Claim
To take advantage of the claim withdrawal procedure, taxpayers should carefully follow the special instructions at IRS.gov/withdrawmyERC, summarized below.
- 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 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 before the refund is approved. Taxpayers 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.
Those who received a refund check, but haven’t cashed or deposited it, can still withdraw their claim. They should mail the voided check with their withdrawal request using the instructions at IRS.gov/withdrawmyERC.
The IRS unveiled a new question and answer checklist last month to help taxpayers understand if they’re eligible for the credit. Since then, the IRS evolved the checklist into an interactive IRS.gov feature to help employers – and the tax professionals working with them – check potential ERC eligibility.
If you have concerns about an ERC claim that you filed or that has been filed on your behalf, contact your KRD advisor.
