Withdrawal Option for Unpaid ERC Claims: What You Need to Know

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Executive summary: IRS announces withdrawal process for Employee Retention Credit claims

The IRS has now launched details offering an option for taxpayers to withdraw their unpaid Employee Retention Credit (ERC) claim. This new withdrawal process delivers on the previous September 19^th introduction of the program (here). Taxpayers concerned about eligibility of ERC claims filed requesting a refund, can withdraw the claim and avoid getting a refund for which they are ineligible. Claims that are successfully withdrawn would be treated as if they were never filed and the IRS will not impose penalties or interest.

Below are the specific details of:

• who can request withdrawal of an ERC claim
• how to request withdrawal of an ERC claim
• what to expect after submitting a withdrawal request.

These details are also available from the IRS Fact Sheet FS-2023-24, found here.

Comment:

This special withdrawal process is a welcome effort by the IRS. Especially for honest taxpayers that may have been misled in the environment of aggressive advertising, direct mail solicitations and online promotions peddled by promoters and marketers of the ERC program. Taxpayers who suspect their unpaid ERC claim is at-risk (lacking employer eligibility and/or substantiation, contains qualified wage calculation errors or otherwise) should first seek the advice of an independent trusted tax professional who understands the complex ERC rules and related interactions of general income tax law. A tax professional will also be able to assist with the claim withdrawal process. Proactive mitigation efforts are strongly advised. Relying on a non-tax professional ERC provider that charged a contingency fee, may not be the best path forward. IRS repayment liability, penalties and interest could prove costly to the unwary.

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Who can request to withdraw an ERC claim

Employers can use the ERC claim withdrawal process if of all the following apply:

• They made the claim on an adjusted employment tax 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.

Employers that can’t use this process may still be able to file another adjusted return if they need to:

• Reduce the amount of their ERC claim
• Make other changes to their adjusted return

How to request to withdraw an ERC claim

Employers that filed their ERC claim through a professional payroll company and want to request a claim withdrawal will need to contact the entity that filed the claim on their behalf. These companies may include a certified professional organization (CPEO), professional employer organization (PEO) or other Internal Revenue Code Section 3504 agents.

Taxpayers that filed an adjusted return to claim the ERC and who want to withdraw their entire claim can use the process below. They must follow the steps for each tax period for which they are requesting a withdrawal. The fax line is a secure, relatively fast way for the IRS to receive withdrawal requests and can be accessed using a computer or mobile device. If the IRS accepts the withdrawal request, the adjusted tax return will not be processed.

Section A: Employers who haven’t received a refund and haven’t been notified their claim is under audit

If the employer filed an adjusted return (Form 941-X, 943-X, 944-X, CT-1X) to claim the ERC and would like to withdraw the entire claim, they can use the process below. If they filed adjusted returns for more than one tax period, they must follow the steps below for each tax period for which they are requesting a withdrawal.

To request a withdrawal, follow these steps:

1. Make a copy of the adjusted return with the claim they wish to withdraw.
2. In the left margin of the first page, write “ ”
3. In the right margin of the first page:
4. Have an authorized person sign and date
5. Write their name and title next to their signature.
6. Fax the signed copy of the return to the IRS’s ERC claim withdrawal fax line at (855) 738-7609 using computer or mobile device. This is the withdrawal request. Keep the copy with tax records.

If a taxpayer can’t fax their request, they can mail the signed copy to the address in the instructions for the adjusted return that applies to their business or organization. Before doing so they should make a copy of the signed and dated first page to keep with their tax records. It will take longer for the IRS to receive a mailed request. Track the package to confirm delivery.

Section B: Employers that haven’t received a refund and have been notified their claim is under audit

Employers facing an IRS audit, also referred to as an exam, can still withdraw their ERC claim. If a taxpayer has been notified that the IRS is auditing the adjusted return that includes their ERC claim, they should prepare their withdrawal request using the steps in Section A, above, but they should not fax it to the withdrawal fax line or mail it using the address below. Instead:

• If they’ve been assigned an examiner, they should communicate with the examiner about how to fax or mail the withdrawal request directly to them.
• If they haven’t been assigned an examiner, they should respond to the audit notice with the withdrawal request, using the instructions in the notice for responding.

Section C: Employers who received a refund check but haven’t cashed or deposited it

Employers that have received a refund check but still haven’t cashed or deposited it, can still withdraw their claim. They need to mail the voided check with their withdrawal request using these steps:

1. Prepare the claim withdrawal request using the steps in Section A, above, but don’t fax the request.
2. Write “ Void” in the endorsement section on the back of the refund check.
3. Include a note that says, “ERC Withdrawal” and briefly explain the reason for returning the refund check.
4. Make copies for tax records of the front and back of the voided check, the explanation notes and the signed and dated withdrawal request page.
5. Don’t staple, bend or paper clip the voided check; include it with your claim withdrawal request and mail it to the IRS at:

Cincinnati Refund Inquiry Unit

PO Box 145500

Mail Stop 536G

Cincinnati, OH 45250

Track your package to confirm delivery.

What to expect after submitting a withdrawal request

Taxpayers will get a letter from the IRS about whether their withdrawal request was accepted or rejected. The approved request is not effective until the taxpayer has the acceptance letter from the IRS.

If the IRS accepts the withdrawal, the taxpayer may need to amend his/her income tax return.

Observations:

There are likely additional tax and legal matters each taxpayer may need to consider other than simply withdrawing an unpaid ERC refund claim and declaring no harm, no foul. Seeking professional tax advice and counsel in these situations cannot be overstated. For example:

• Income tax returns may need to be amended. Note that this may include correcting a previously filed partnership income tax return subject to the BBA partnership audit rules. These underdeveloped rules pose some additional administrative burdens and possibly surprising tax results to its partners.
• Taxpayers may have more than one ERC claim they are considering voluntarily unraveling. The IRS withdrawal process is limited only to unpaid claims filed on an adjusted employment tax return (Forms 941-X, 943-X, 944-X, CT-1X) with no other adjustments. ERC claims that (1) do not meet the withdrawal process criteria and are suspected to be in error and/or (2) are believed to be meritorious, albeit overstated (vs. wholly erroneous), may require separate attention and tax professional advisory oversight. The IRS will be providing additional details on a settlement program in the fall. The program will allow businesses to repay ERC claims and avoid penalties and future compliance action.
• The ERC claim withdrawal process comes in the wake the September 14^th IRS announcement placing a moratorium on processing new ERC claims. An unprecedented IRS action. The IRS has continued to caution taxpayers that anyone who incorrectly claims the ERC, has to pay it back and may owe penalties and interest. The IRS has trained auditors to examine the ERC claims posing the greatest potential for error.
• The IRS has reminded taxpayers that withdrawing a willfully filed fraudulent claim, will not exempt them from the imposition of penalties and potential criminal investigation and prosecution. The IRS Criminal Investigation division is actively working to identify ERC fraud and promoters of fraudulent ERC claims for potential referral for prosecution. A more serious matter if involved that may require both tax and legal counsel.
• Taxpayer’s that have paid contingent fees to an ERC provider, may need to consider their engagement contract entered into with the provider and pursue options to recoup any part of the fee related to an invalid ERC claim.

Like most matters in the federal income tax area, taxpayer results are unique. Comparisons across a broad spectrum of taxpayers are hardly linear. Our commentary here only highlights some of the tax compliance and IRS enforcement actions businesses with at-risk ERC claims should take seriously. Stay tuned for more ERC updates with respect to the impending IRS settlement program for paid claims.

We’re Here to Help

Bennett Thrasher has expertise in handling IRS Employee Retention Credit tax issues with the IRS. For more information, please contact Tim Watt, Tax Partner, or James Pickett, Director of Tax Controversy, or by calling 770.396.2200.

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