The Internal Revenue Service has announced the much-anticipated procedures by which employers that applied for the Employee Retention Credit (“ERC”) can withdraw their claims. According to the IRS, many of the 3.6 million ERC claims filed are improper, due in part to misleading claims about the ERC program. Through the new withdrawal procedures, the IRS is encouraging businesses to reconsider ERC claims that may be of questionable merit by offering relief from potential penalties that may be imposed for erroneous refund claims.
For months, the IRS has issued repeated warnings about the ERC, placing abusive ERC schemes first on its 2023 “Dirty Dozen” list of abusive transactions. On September 14, 2023, the IRS imposed a moratorium on processing ERC claims through December 31, 2023, while it reviewed its ERC procedures.
The IRS continues to audit ERC claims. While employers have the right to defend any ERC claim filed and may pursue an administrative appeal, if these efforts are unsuccessful, the IRS can proceed directly to collections. On July 24, 2023, in an effort to expedite the recovery of erroneous refunds for ERC, the IRS issued final regulations (T.D. 9978) treating the erroneous refunds of pandemic-related employment credits as underpayments of the taxes imposed under 26 U.S.C. § 3111 when applicable, resulting in excess refunds being subject to assessment, penalties, and administrative collection procedures.
Employers notified of an audit can still participate in the withdrawal program by sending the withdrawal request to the examiner assigned to their audit or in response to the audit notice if no examiner has been assigned. The IRS established a special fax line to receive withdrawal requests from employers whose claims are not under audit.
To be eligible for the withdrawal option, an employer must meet the following criteria:
- The ERC claim must have been filed on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1x).
- The adjusted return(s) must contain no adjustments other than the ERC claim.
- The entire ERC claim must be withdrawn.
- The IRS must not have paid the ERC claim or, if it has paid the claim, the employer must not have deposited the refund check.
According to IRS Commissioner Danny Werfel, “[t]he withdrawal option allows employers with pending claims to avoid future problems, and we encourage them to closely review the withdrawal option and requirements. We continue to urge taxpayers to consult with a trusted tax professional rather than a marketing company about this complex tax credit.”
Notably, the IRS emphasized that the withdrawal of a fraudulent ERC claim will not immunize employers or their advisors from potential criminal investigations and prosecutions for willfully filing, or willfully assisting or conspiring to file, a fraudulent ERC claim. The IRS continues to aggressively investigate fraudulent ERC claims and suspected ERC promotion schemes.
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