October 27, 2023
IRS allows certain employers to withdraw employee retention credit claims
The IRS announced (IR-2023-193) a process allowing certain employers to withdraw their ERC claims. Claims that are withdrawn will be treated as if they were never filed and will not be subject to penalties or interest.
On September 14, 2023, the IRS had announced that it was immediately pausing processing of new ERC claims through at least the end of the year due to continuing concerns over improper claims (see Tax Alert 2023-1561).
In announcing the new process on October 19, 2023, IRS Commissioner Danny Werfel said that the "withdrawal option allows employers with pending claims to avoid future problems, and we encourage them to closely review the withdrawal option and the requirements. We continue to urge taxpayers to consult with a trusted tax professional rather than a marketing company about this complex tax credit."
The ERC is a refundable federal employment tax credit that was first enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in 2020 and repeatedly modified and extended. The credit is available for qualified wages paid by eligible employers during the pandemic from March 13, 2020, through September 30, 2021. The credit is generally claimed by filing a refund claim for the relevant quarter. While many refund claims already have been paid, others are still pending. The IRS has noted its concerns about the legitimacy of many of the refund claims, putting aggressive promotion of the ERC at the top of its "Dirty Dozen" list of tax scams for 2023.
The IRS has received approximately 3.6 million ERC claims since the program started. According to the IRS, the total inventory of unprocessed Forms 941-X, on which the ERC is claimed, was approximately 849,000 as of October 11, 2023.
Employers are eligible to withdraw their ERC claim under this new process if they:
Taxpayers that do not fulfill all of these requirements can amend their return but cannot withdraw their claim.
Taxpayers that fraudulently filed an ERC claim will still be subject to criminal investigation and prosecution even if they withdraw their claim.
Instructions for claim withdrawal
The IRS has created a webpage with specific instructions on how to withdraw ERC claims, including which form to file, what to write on the form and where and how to send the form to the IRS. There are different steps depending on taxpayers' situations, including whether they have received a refund and/or been notified that their claim is under audit. Employers that have been notified they are under audit can send the withdrawal request to the assigned IRS examiner.
The IRS said employers that used a professional payroll company to file their claims should consult the company to determine if the company has to submit the withdrawal request on their behalf.
After a taxpayer submits the withdrawal request, the IRS will send a letter to confirm if the withdrawal request was accepted or rejected. If withdrawal requests are accepted, taxpayers will have to amend their income tax returns.
Employers interested in withdrawal should consider the merits of the underlying claim and whether the prerequisites for withdrawal are met. Because employment taxes can be adjusted without interest or penalties in the normal course, employers should also consider whether the special withdrawal process will be useful considering the employer's particular circumstances. For example, an employer might wish to reduce the amount of the claim based on the technical merits of the underlying positions instead of withdrawing its ERC claim.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor