Amid an ongoing federal crackdown on fraud in COVID-19 relief programs, the IRS announced that it will offer certain employers an opportunity to withdraw Employee Retention Credit (ERC) claims if they are concerned about their accuracy.

The new withdrawal option allows an employer that filed ERC claims but has not yet received a refund to withdraw its submission and avoid future repayment, interest and penalties. An employer that filed an ERC claim that the IRS is still processing can withdraw its claim to avoid potentially receiving a refund for which it is ineligible. However, the program does not protect employers who knowingly participated in or assisted in filing a fraudulent claim from potential criminal investigation and prosecution. For this and other reasons, employers considering the new withdrawal option should consult an attorney and/or their tax professional to determine their eligibility and the best course of action.

For two years, the IRS and Department of Justice have investigated fraud in COVID-19 relief programs, even creating a Covid-19 Fraud Task Force. After the U.S. Inspector General for Tax Administration admonished the IRS for its lax controls over ERC claims, the IRS renewed its warnings about third parties encouraging employers to claim the ERC even when the employers don’t qualify, the Department of Justice began returning indictments of ERC “promoters,” and the IRS announced it had suspended processing new ERC claims through at least the end of 2023 and will subject already filed claims to increased scrutiny.

IRS Fact Sheet Explains ERC Withdrawal Option

In conjunction with a press release announcing the relief program, the IRS issued a fact sheet providing details for employers wanting to take advantage of the new ERC withdrawal option. According to the fact sheet, employers can withdraw their ERC claims through this new process if they meet the following four requirements:

• They made the claim on an amended employment tax return.
• They filed the amended return only to claim the ERC and made no other adjustments.
• They request the withdrawal of the entire ERC claim.
• The IRS has not paid their claim or, if IRS has paid the claim, the employer has not cashed or deposited the refund check.

If an employer does not satisfy all of these requirements (because, for instance, the employer made the ERC claim on an original employment tax return, they made additional changes to the amended return, they are only requesting a withdrawal of part of the ERC claim, or they have cashed/deposited the refund claim), the IRS has issued a Frequently Asked Questions sheet providing additional details.

The fact sheet also describes how employers should withdraw their ERC claims. The first method is for employers that used a third-party professional payroll company, certified professional organization or professional employer organization. In those instances, employers need to contact the third party to make the withdrawal. Other employers will follow one of three methods, depending on whether they have not received their ERC refund and are not under audit, they have not received their ERC refund and are under audit, or they have received their ERC refund but have not deposited or cashed it. Employers must take the appropriate steps under each method separately for each tax period for which they are requesting a withdrawal.

Employers That Have Not Received Their ERC Refund and Are Not Under Audit

For employers that have not received their ERC refund and are not under audit, the steps for each tax period are straightforward:

1. On a copy of the amended return with the ERC claim they wish to withdraw, write “withdrawn” on the left top side.
2. On the same copy, in the middle of the top, print the name and title of the person authorized to withdraw the ERC claim.
3. On the same copy, on the right top side, next to the written name and title of the person authorized to withdraw the ERC claim, the person authorized to withdraw the ERC claim should sign and date the document.
4. Fax the signed withdrawal request to the IRS at (855) 738-7609. If the employer does not have a fax, the employer should mail the signed document to the same address where they filed the amended return.

Employers That Have Not Received Their ERC Refund and Are Under Audit

Employers that have not received their ERC refund but are under audit, have slightly different steps to take:

1. On a copy of the amended return with the ERC claim they wish to withdraw, follow the first three steps identified above for employers who have not received the ERC refund and are not under audit.
2. Do not fax or mail the signed withdrawal request to the IRS.
3. Instead, if the IRS has assigned a revenue agent to the audit, the employer should contact the revenue agent and follow the revenue agent’s instructions for submitting the signed withdrawal request.
4. If the IRS has not assigned a revenue agent to the audit, the employer should respond to the IRS audit notice with the signed withdrawal request, using the instructions in the IRS notice for responding.

Employers That Have Received Their ERC Refund but Have not Deposited or Cashed It

Employers that have received their ERC refund but have not deposited or cashed it need to void the check and return it to the IRS. There are four steps:

1. On a copy of the amended return with the ERC claim they wish to withdraw, follow the first three steps identified above for employers who have not received the ERC refund and are not under audit – but do not fax or mail the signed withdrawal request to the IRS.
2. Write “void” on the back of the check, in the endorsement area.
3. Write a short letter titled, “ERC Withdrawal,” explaining why the employer is returning the refund check. It should be enough to note that, after a review of internal records the employer has determined that it is not entitled to the ERC and is therefore returning the refund check.
4. Mail the signed withdrawal request, the voided check, and the short letter to the IRS at Cincinnati Refund Inquiry Unit, PO Box 145500, Mail Stop 536G, Cincinnati, OH 45250.

In all instances, an employer should keep a copy of anything it mails to the IRS and send the documents using a method that will allow the employer to track the package.

After an employer submits a signed withdrawal request, the IRS will respond with a letter accepting or rejecting it. The fact sheet did not identify reasons why the IRS might reject the withdrawal. The request is effective once the employer receives the IRS letter accepting the withdrawal request. Note that once the IRS accepts the withdrawal request and the employer receives the letter from the IRS accepting the withdrawal request, the taxpayer will likely need to amend their income tax return for the year that includes the periods for which it withdrew its ERC claim, in order to claim the deduction for wages paid that it should not have claimed when it initially requested the ERC.

Importantly, the fact sheet notes that if an employer requests a withdrawal, it means the employer is asking the IRS not to process the entire amended employment tax return for the tax period that included the ERC claim. The IRS will treat claims that an employer withdraws as if the employer never filed them and the IRS will not impose penalties or interest. Employers who filed ERC claims for which they were not eligible and did not withdraw the claims will not only have to repay the tax but will also face assessment of penalties and interest. Moreover, the press release reiterated that employers who willfully filed a fraudulent claim, or those who assisted or conspired in such conduct, cannot avoid the consequences of their action by withdrawing the claim — withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.

Key Takeaways

The new ERC withdrawal option encourages employers to withdraw ERC claims for which they were, and are, not eligible. The carrot the IRS offers is the elimination of penalties and interest, in service to assisting small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims, as well as a potentially quicker resolution of ERC issues by avoiding audits. The stick the IRS holds in its other hand, however, is not only taxes, penalties, and interest, but also — for those employers who willfully filed a fraudulent claim — the potential for criminal investigation and prosecution. Employers who filed an ERC claim and are eligible for the ERC withdrawal option should, at a minimum, consult with a trusted tax professional to consider their options, thoroughly review their ERC eligibility, and determine whether the carrot of penalty and interest elimination outweighs the risk of potential criminal investigation and prosecution.

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