IRS issues procedures to withdraw pending ERC claims

The IRS announced (IR-2023-193 and FS-2023-4) a special process on Oct. 19 to allow employers who are concerned about the accuracy of their employee retention credit (ERC) claims to withdraw the claims. This new withdrawal process allows certain employers that filed an ERC claim but have not yet received a refund, or have not deposited or cashed the refund check. to withdraw their submission and avoid future repayment, interest and penalties. According to the IRS, claims that are withdrawn will be treated as if they were never filed. 

The ERC is a refundable tax credit designed for employers that continued paying employees during the COVID-19 pandemic while their business operations were fully or partially suspended due to a governmental order, or had a significant decline in gross receipts during the eligibility periods. The rules surrounding which employers are eligible for the credit and which wages count toward the credit are complex, and that has led to some uncertainty when claiming the credit. In addition, the IRS has repeatedly acknowledged that it is aware of aggressive ERC marketers and promoters who pressure or mislead employers into claiming ERCs that they may not be entitled to claim. This withdrawal process is meant to allow these employers to request the IRS to drop their ERC claim. 

While an employer who withdraws a claim will not be subject to penalties and interest on an incorrect ERC refund, the IRS stated that taxpayers who willfully filed a fraudulent claim, and those who assisted or conspired in such conduct, should be aware that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution. Also, according to the IRS, a withdrawal request is valid only if it is accepted by the IRS, which indicates that the IRS could reject withdrawal requests. The IRS has not indicated under what circumstances it will reject a withdrawal request. 

The IRS withdrawal process is part of a larger ERC compliance effort that was first described in September 2023, along with an immediate moratorium on processing claims for the ERC filed on or after Sept. 14, 2023. The IRS also said it is preparing a settlement initiative for taxpayers who may have filed improper claims and already received refunds. 

The IRS has outlined the entire process for withdrawing ERC claims on its website. The following is a summary of the eligibility requirements and procedures. If an employer used a professional payroll company (e.g., a certified professional employer organization) and the payroll company field the ERC claim for the employer, the employer should consult with the payroll company prior to requesting a withdrawal. 

Who is eligible for a withdrawal

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 taxpayer hasn’t cashed or deposited the refund check

In situations where an employer claimed an ERC in multiple calendar quarters using a Form 941-X (or other applicable form) for each applicable quarter, it appears the employer can withdraw the ERC either for every quarter or select quarters. As discussed below, the withdrawal process must be followed for each calendar quarter for which the employer requests a withdrawal of the claim.

The IRS explained that employers who are not eligible to use the withdrawal process because they do not meet all of the requirements may be able to amend their prior returns (e.g., Forms 941-X, 943-X, 944-X, CT-1X) in certain circumstances. Under new FAQs issued in conjunction with the withdrawal process, the IRS indicated that amended returns may be available if (i) an employer is entitled to some of the credit originally claimed, but not the entire claim, or (ii) the employer wants to withdraw an ERC claim, but also needs to make other changes to the originally filed return. In those cases, the IRS indicated that an employer should prepare a new adjusted return (Form 941-X, Form 943-X, Form 944-X, Form CT-1X) with the correct amount of the ERC and any other corrections for that tax period and mail the new adjusted return to the IRS using the address in the instructions for the form that applies to the employer.

The IRS indicated further that it is also working on guidance to help employers that were misled into claiming the ERC and have already received payment of the ERC. The IRS expects to issue more details on this additional guidance later this fall.

Withdrawal process: No check received

The process to withdraw an ERC claim when an employer has not yet received the refund check is fairly straightforward: 

• Make a copy of the adjusted return (e.g., Form 941-X) with the ERC claim the employer wishes to withdraw
  
• Write “Withdrawn” in the left margin of the first page
• In the right margin of the first page, an authorized person should sign and date it and write the signer’s name and title next to the signature
• Fax the signed copy of the return to the IRS’s ERC claim withdrawal fax line at 855-738-7609
• Retain a copy for the employer’s records

The IRS provides an illustrative example of a Form 941-X used to withdraw an ERC claim on its website.

Importantly, if an employer filed Forms 941-X for multiple calendar quarters to claim an ERC and the employer wishes to withdraw the claim for each quarter, a withdrawal must be requested for each calendar quarter using the Form 941-X for each quarter. An employer cannot use a single Form 941-X to request withdrawals for multiple quarters.

If an employer cannot fax the withdrawal request, the employer can mail the request to the address in the instructions for the adjusted return that applies to the employer. However, employers that mail the request will likely have to wait longer to receive their acceptance letter from the IRS. 

Withdrawal process: Under IRS exam

Employers who are under IRS exam may still request a withdrawal of an ERC claim. These employers should prepare the withdrawal request as outlined above, but should not fax or mail the withdrawal request. Instead, the employer should contact the examiner to determine how the withdrawal request should be submitted.

If an employer under IRS exam has not been assigned an examiner, they should respond to the audit notice with the withdrawal request, using the instructions in the notice for responding. 

Withdrawal process: Check already received

An employer may have received an ERC refund check before requesting a withdrawal.  The IRS provided on its website procedures for these employers to withdraw the claim prior to cashing or depositing the check. If an employer has already cashed or deposited a refund check, it appears the withdrawal procedures are not available. 

However, as noted above, employers who are not eligible for the withdrawal program may be able to file amended returns in certain circumstances and the IRS noted that it is also working on guidance to help employers who were misled into claiming the ERC and have already received the payment – more details on the new guidance is expected later this fall.  

After requesting the withdrawal

The IRS will send employers who requested a withdrawal a letter indicating whether their request was accepted or rejected. An approved request is not effective until the acceptance letter is received from the IRS. The IRS has not provided additional procedures for situations where a request is rejected. If the withdrawal request is accepted, the employer may need to amend its income tax returns. This would likely apply in situations where the employer already amended its income tax return to disallow its compensation deduction by the amount of the ERC claimed.