Recent IRS warnings and announcements regarding the Employee Retention Tax Credit (ERC) have raised some businesses’ concerns about the validity of their claims for this valuable, but complex, pandemic-related credit — and the potential consequences of an invalid claim. In response, the IRS has rolled out a new process that certain employers can use to withdraw their claims.
Fraudsters jump on the ERC
The ERC is a refundable tax credit intended for businesses that: 1) Continued paying employees while they were shut down due to the pandemic in 2020 and 2021; or 2) Suffered significant declines in gross receipts from March 13, 2020 to December 31, 2021. Eligible employers can file claims until April 15, 2025 (on amended returns) and receive credits worth up to $26,000 per retained employee.
With such potentially large payouts, fraudulent promoters and marketers have been quick to rush in with offers to help businesses file claims in exchange for fees in the thousands of dollars or for a percentage of any refunds received. The requirements for the credit are strict, though, and the IRS has found that many of these claims fall short of meeting them.
Invalid claims put taxpayers at risk of criminal prosecution and liability for credit repayment, penalties and interest. Taxpayers should note that promoters may leave out key details, which could lead to what the IRS describes as a “domino effect of tax problems” for unsuspecting employers.
The IRS responds
The wave of fraudulent claims has produced escalating action from the IRS. In July 2023, the agency announced that it was shifting its ERC review focus to compliance concerns, with intensified audits and criminal investigations of both promoters and businesses filing suspect claims. Two months later, it imposed a moratorium on the processing of new ERC claims.
The moratorium, prompted by “a flood of ineligible claims,” will last until at least the end of 2023. The processing of legitimate claims filed before September 14 will continue during the moratorium period but at a much slower pace. The IRS has extended the standard processing goal of 90 days to 180 days and potentially far longer for claims flagged for further review or audit.
Now, the IRS has unveiled a new withdrawal option for eligible employers that filed claims but have not yet received, cashed or deposited refunds. Taxpayers that withdraw their claims need not fear repayment, penalties or interest (the IRS also is developing assistance for employers that were misled into claiming the ERC and have already received payment).
The withdrawal option is available if you:
- Claimed the credit on an adjusted employment return (for example, Form 941-X);
- Filed the adjusted return solely to claim the credit;
- Want to withdraw your entire ERC claim; and
- Have not been paid your claim, or the IRS has paid your claim, but you have not cashed or deposited the refund check.
The exact steps vary depending on your circumstances, including whether you filed your claim yourself or through a payroll provider, have been notified that you are under audit, or have received a refund check that you have not cashed or deposited. Regardless of the applicable procedure, your withdrawal is not effective until you receive an acceptance letter from the IRS. If your withdrawal is accepted, you may need to amend your income tax return.
Taxpayers that are not eligible for the withdrawal process can reduce or eliminate their ERC claims by amending their returns.
Throughout its warnings about potential ERC pitfalls, the IRS has continued to urge taxpayers to consult “trusted tax professionals.” If you are having second thoughts about your ERC claim, we can help you review your claim and, if appropriate, properly withdraw it.