A pandemic-era tax break for small businesses has become a magnet for fraud. Aggressive marketing and scams have led to a number of questionable or wrongly filed claims for the Employee Retention Credit (ERC), prompting the IRS to halt the processing of any future ERC claims filed until 2024 and issue guidance for business owners on how to withdraw ERC claims not yet processed and avoid repercussions.
Issues With Fraudulent or Ineligible Claims
The ERC is a refundable tax credit for those who paid qualifying wages to employees during the height of the COVID-19 pandemic to keep their staff employed. So far, the IRS has issued approximately 3.6 million claims for the ERC.
However, the IRS continues to see an uptick in fraudulent or ineligible claims. ERC promoters misled many small business owners into thinking they were eligible for the credit when they were not. Improper claims must be paid back, possibly with penalties and interest. Thousands of ERC claims have been referred for audit, and the IRS has hundreds of criminal cases currently being investigated.
We have heard and received many promotional and marketing offers to help file for the ERC if you “were impacted by COVID-19.” There are two ways an employer who paid wages during the pandemic can qualify for an ERC. The first is based on a reduction in revenue. The second is based on a shutdown or suspension of operations due to a government mandate. This latter method of being impacted by “a shutdown or suspension of operations due to a government mandate” is where most of the fraudulent ERC claims occur. Even if you qualify under the shutdown or suspension rules, you must prove a revenue reduction for a portion or division of your business or a drop in employee productivity. If you filed for an ERC under this method, we strongly recommend you have a full understanding of your eligibility and are comfortable that you qualify for the ERC.
New ERC Withdrawal Process
In October, the IRS released guidance on the new withdrawal process for business owners to withdraw their claims and avoid future repayment, interest, and penalties. The new process allows employers who filed an ERC claim for which they are ineligible and have yet to receive a refund to withdraw their claim. Those with claims that have yet to be processed, are under examination, or have been paid but have yet to be deposited are included. Withdrawn claims will be treated as if they were never filed, and the IRS will not impose penalties or interest.
Check Your Eligibility
To see if you are eligible to withdraw your ERC claim, employers must make sure all the following apply:
- You claimed the ERC on an adjusted employment tax return (Forms 941-X, 943-X, 944-X, CT-1X)
- You filed the adjusted tax return only to claim the ERC and made no other adjustments
- You must withdraw the entire amount of the ERC claim
- The IRS has not paid your claim, or the IRS has paid the claim, but you have not cashed or deposited the refund check
Withdraw Your Claim
If you think you may want to withdraw your ERC claim, you should first contact the professional who helped you file for the ERC. For those who filed a claim themselves but haven’t received, cashed, or deposited a refund check and have not been notified that their claim is under audit, you can fax your withdrawal requests to the IRS. The IRS set up a special fax line at 855-738-7609. If you cannot fax your request, mailing it is also an option, but it will likely take longer. Employers under audit can send the withdrawal request to the assigned examiner or respond to the audit notice if no examiner has been assigned. Finally, those who received a refund check but haven’t cashed or deposited it can still withdraw their claim. Mail the voided check with your withdrawal request to:
Cincinnati Refund Inquiry Unit
PO Box 145500
Mail Stop 536G
Cincinnati, OH 45250
For further instructions on withdrawing your ERC claim, visit the IRS website: IRS.gov/withdrawmyerc.
If you have any ERC-related questions, consult with the tax and financial experts at RDG+Partners at 585-673-2600.