Because of promoters aggressively pushing schemes to claim the employee retention credit (ERC) and the resulting confusion surrounding eligibility, the IRS has released guidance for employers wanting to withdraw their ERC refund claims. This guidance follows the IRS’ moratorium on processing ERC claims, which will last at least until the end of this year.
The ERC offered eligible employers, including tax-exempt organizations, a refundable credit of up to $26,000 for wages paid per employee for the combined 2020 and 2021 tax years. Employers claimed the ERC by amending quarterly federal employment tax returns for 2020 and 2021, and the credit was a refundable offset of the employer’s portion of Social Security taxes.
To qualify for the ERC, employers had to experience either a significant decline in gross receipts or a full or partial shutdown of operations due to a governmental order during the pandemic. Promoters frequently pushed employers to apply for the ERC without fully vetting eligibility or advising on the aggregation rules and by wrongly citing generic supply chain disruptions as support for claiming the ERC.
The withdrawal process offers a way out for employers who no longer believe they are eligible to claim the ERC. To withdraw an ERC claim, employers must meet all of the following criteria:
- The claim was made on an adjusted employment tax return (Forms 941-X, 943-X, 944-X, CT-1X).
- The adjusted return was filed solely to claim the ERC and included no other adjustments.
- The employer is withdrawing its entire ERC claim, not merely a portion of it.
- The IRS has not paid the claim, or the employer has not cashed or deposited the refund check.
The withdrawal process generally involves refiling a copy of the adjusted returns claiming the ERC and noting “Withdrawn” on the return. Depending on whether an employer’s ERC claim is under audit or if a refund check was issued, the specific instructions for withdrawal slightly differ. In any case, withdrawing an ERC claim means that the IRS will not process the claim, so the claim will be treated as if it were never filed. No penalties or interest will be imposed except in cases of willfully filing fraudulent claims.
See our prior alert “Qualifying for the Employee Retention Credit and Partial Shutdowns” for a discussion of eligibility, including supply chain disruptions and common pitfalls when making an ERC claim. If you believe you may not be eligible for the ERC and would like to explore withdrawing your claim, we can assist.
If you have questions about this alert, please contact the authors or the Steptoe & Johnson Taxation and Nonprofit Law Team.