Executive summary: ERC claim withdrawal process allows employers to avoid potential penalties and interest
The IRS announced a simplified method for employers to withdraw an unpaid ERC claim and avoid potential penalties and interest if they now believe they are ineligible for the claim. Employers can withdraw by fax. Employers who already received an ERC refund but believe they were misled into claiming it will have access to an additional program to be announced this fall. IRS encourages employers to consult with “a trusted tax professional who understand the complex ERC eligibility rules, not a promoter or marketer trying to get a hefty fee."
IRS announces ERC Withdrawal Program
The IRS is offering a method for employers who filed a claim requesting a refund for the Employee Retention Credit (ERC) and now believe they may not be eligible for the ERC to withdraw their claim. The method is available only to those who have not yet received a refund and whose claim is currently in process with the IRS. Withdrawing the claim before any refund is issued will allow employers to avoid future repayment of invalid refunds and potential penalties and interest.
Who can withdraw their ERC claim?
Only employers who meet all the following criteria can request withdrawal of an ERC claim via the new option:
- The employer made the ERC claim on an adjusted employment tax return, i.e., Forms 941-X, 943-X, 944-X, CT-1X;
- The employer’s sole purpose for filing the adjusted return was to make an ERC claim and no other adjustments were made on the adjusted return;
- The employer wishes to withdraw the ERC claim in its entirety; and
- The IRS has not yet paid the employer’s ERC claim, or the IRS has paid the claim but the employer has not cashed or deposited the refund check.
An employer who does not meet all of the above criteria can reduce or eliminate its ERC claim only by filing an amended return.
How can an employer request withdrawal of an ERC claim?
Employers who have not yet received an ERC refund and wish to withdraw their claim are instructed to make a copy of the adjusted return (Form 941-X) they wish to withdraw and write “Withdrawn” in the left-hand margin of the first page. In the right-hand margin, an authorized person must sign, with printed name and title and date the page. Fax the signed copy to the dedicated fax line at (855) 738-7609. If an employer cannot fax their request, they may mail a copy of the adjusted return, marked as described above, to the IRS address for filing adjusted returns applicable to their business or organization.
Employers must follow this process for each tax period for which they wish to withdraw a claim. For example, if an employer has claimed ERC for the second, third and fourth quarters of 2020 but now believes they only meet eligible for the second quarter, they will need to fax copies of their Forms 941-X withdrawing the claim for both the third and fourth quarters of 2020.
Employers who filed their claim through a professional payroll company, such as a CPEO, PEO or Section 3504 agent, and want to withdraw the claim will need to contact the entity that filed the claim on their behalf.
Employers that haven’t received an ERC refund and have received an IRS audit notification can still withdraw but will need to coordinate doing so with the IRS examiner assigned to their examination or by faxing a claim withdrawal request as described above in response to the audit notice, using the instructions in the notice for responding.
Employers who received a refund check but have not cashed or deposited it can still withdraw their claim by preparing a claim withdrawal request as described above and mailing, with tracking, the withdrawal request along with the voided check and a note that says “ERC Withdrawal” to the following address:
Cincinnati Refund Inquiry Unit
PO Box 145500
Mail Stop 536G
Cincinnati, OH 45250
What is the impact of an ERC withdrawal?
Employers who withdraw their claim through this process are asking the IRS not to process the entire adjusted employment tax return. Employers who made other adjustments on a claim or who are seeking only to adjust the amount of ERC claimed will need to file an adjusted employment tax return or Form 941-X. Claims that are withdrawn will be treated as if they were never filed, and the IRS will not assess penalties or interest. However, the IRS warned that businesses that willfully filed fraudulent claims or assisted in such conduct will not be exempt from potential criminal investigation and prosecution by using the withdrawal process.
Employers who utilize the withdrawal process will get a letter from the IRS about whether their request was accepted or rejected. Employers are encouraged to consult with a trusted tax professional about whether they may need to amend their income tax return.
What about those who have already received ERC refunds?
Employers who claimed ERC and already received a refund are not eligible for the ERC withdrawal process. However, the IRS announced that guidance for employers who were misled into claiming ERC and now believe they were ineligible will be announced this fall.
The IRS continues to emphasize its concerns with aggressive marketers and scammers, noting that some have responded to the recently announced ERC processing moratorium with even more aggressive pitches pushing employers into agreeing to costly up-front loans in anticipation of a refund. The IRS encourages employers to learn the warning signs of ERC scams and consult with a trusted tax professional.