The IRS unveiled another twist this month in the ever-changing saga that is the Employee Retention Credit (ERC). You may recall the last loop occurred on September 14, 2023, when the IRS announced a moratorium on new ERC claims. As part of the moratorium, the IRS indicated it planned to provide guidance soon, allowing employers to withdraw ERC claims in limbo with IRS processing and payment. That guidance was released by the IRS last week. Let’s dig in:
IRS Guidance with ERC Withdrawal Option
The new withdrawal feature unfurled by the IRS allows an employer that has submitted an ERC claim – but has not yet received their ERC refund – the ability to withdraw the claim. By withdrawing their ERC claim, an employer can avoid interest and penalties associated with an ineligible claim. According to the IRS in its announcement, “claims that are withdrawn will be treated as if they were never filed.” Please note: the IRS further states that employers who filed a fraudulent ERC claim (or who assisted with the fraudulent claim) will not avoid possible criminal investigation if they withdraw their claim.
IRS Withdrawal Instructions for ERC Claims
The IRS provides withdrawal details and instructions here.
It offers three methods for an employer to follow if seeking to withdraw an ERC claim. The method depends on where the employer is in the ERC claim process, as follows:
1. If the employer filed their ERC claim, but they have not been paid or notified the claim is being audited by the IRS, the IRS states that these steps must be followed:
- Make a copy of the adjusted return with the claim an employer wishes to withdraw.
- In the left margin of the first page, write “Withdrawn.”
- In the right margin of the first page, have an authorized individual sign and date it. Write their name and title next to their signature.
- Fax the signed copy of the ERC withdrawal return to the IRS’s ERC claim withdrawal fax line at 855-738-7609. The employer should keep a copy for their tax records.
- On the IRS website, employers can find a mock-up of Form 941-X, showing the notations employers should make in their ERC withdrawal form. Please follow these steps carefully.
2. If the employer filed their ERC claim, the claim has not been paid but they have been notified their claim is being audited by the IRS, the IRS indicates these steps must be followed:
- Do not submit the withdrawal to the fax number noted above.
- If an employer has been assigned an IRS auditor, contact the auditor about submitting the ERC withdrawal request directly to them.
- If an employer has not been assigned an IRS auditor, respond to the IRS audit notice with the ERC withdrawal request by following the instructions in the notice.
3. If the employer filed their ERC claim, received their refund check but has not cashed the refund check yet, the IRS states the following steps to abide by:
- Prepare the ERC claim withdrawal request following the steps in #1 above. However, do not fax in the request.
- Write “Void” in the endorsement section on the back of the refund check.
- Include a note stating, “ERC Withdrawal,” and briefly explain the reason for returning the refund check.
- Make copies of the front and back of the voided check; the explanation notes; and the signed and dated ERC withdrawal request for tax records.
- Include this voided check with the ERC claim withdrawal request and mail it to the IRS at:
Cincinnati Refund Inquiry Unit
P.O. Box 145500
Mail Stop 536G
Cincinnati, OH 45250
Factors to Consider in Withdrawing an ERC Claim
Now that the IRS has issued these procedures, employers with a pending ERC claim may wonder whether to withdraw the claim or not. Below are our top considerations for employers when making this determination:
- The IRS indicated when it issued its moratorium that employers should revisit their ERC claim and address the latest ERC guidance. The IRS noted the possible existence of frivolous ERC claims – this, in addition to enhanced IRS scrutiny of ERC claims – suggests employers should take a second look at their ERC claim and seek an independent review as necessary. There was also a checklist issued with the moratorium that we recommend referencing for support.
- After this review, if an employer believes they don’t qualify for the ERC, they should attempt to withdraw the claim to avoid IRS penalties. However, if an employer feels confident their ERC claim is justified and can be substantiated, they should continue to wait for the ERC claim to be processed – no need to withdraw it.
- Another key aspect in this analysis includes if an employer paid a contingent fee (often in the range of 10%-30%) to a third-party ERC provider for the refund claim. The employer should closely review the terms of their fee agreement with the third party-provider. If the fee is paid when the employer receives their ERC refund from the IRS, then by withdrawing the claim, there would likely be no fee owed to the third-party provider. Employers are encouraged to contact their attorney to determine what the contract spells out.
- However, if the contingent fee was paid to the third-party provider at the time the ERC claim was submitted, an employer could request to have this fee refunded. Should the IRS eventually disallow these claims, many employers may seek repayment and other relief from third-party providers – although, it is uncertain if the providers will be able to reimburse all requests.
- With possible IRS penalties and the prospects of not being able to fully recover a hefty fee paid to a third-party provider, employers with disallowed claims could end up coming out behind.
Examples
The following examples are intended to help in addressing whether a business should withdraw its ERC claim under the new IRS guidance.
- Company A is a distributor that experienced a 45% reduction in gross receipts in its first quarter of 2021 compared with 2019. It determined it qualified for the ERC for the first two quarters of 2021. It performed this analysis internally and did not engage a third-party provider to assist. In December of 2022, it filed an ERC refund claim on Form 941-X, seeking a refund of $400,000.
However, the ERC claim was caught in the IRS backlog of claims awaiting processing. When the withdrawal option was issued by the IRS, Company A still had not received its ERC refund of $400,000. In this situation, Company A followed IRS recommendations and reviewed its ERC calculations for gross receipts, wages, etc., and completed the IRS-issued ERC checklist. It determined it still qualified for the ERC for the first two quarters of 2021.
Company A decided it would not withdraw its ERC claim and would continue to wait for it to be processed and paid by the IRS.
- Company B is a manufacturer that did not experience any reduction in gross receipts in 2020 or 2021 in all comparable quarters to 2019. In fact, it saw increases in revenue. Further, it was not subject to any government order that led to a full or partial shutdown of its business operations in 2020 or 2021.
Initially, it determined it did not qualify for the ERC in 2020 or 2021. Then in May 2023, Company B was approached by a third-party provider stating it might qualify for an ERC refund due to supply chain issues. The provider informed the manufacturer that this would make them eligible for the ERC (being subject to a government order causing a shutdown in its business operations). Company B could not identify any particular government order that impacted its business operations, but the provider told them they still qualified.
In June 2023, the provider prepared a Form 941-X seeking ERC refunds of $800,000 for 2020 and 2021, and Company B filed this claim with the IRS. Company B agreed to pay the third-party provider $250,000 once it received its expected refund of $800,000 from the IRS. When the withdrawal option was issued by the IRS, Company B had not received its ERC refund. In this situation, Company B followed the IRS recommendations and reviewed its ERC calculations for gross receipts, government orders, wages, etc., and completed the ERC checklist. It also consulted with an independent tax professional and determined it did not qualify for the ERC in 2020 and 2021.
Company B decided it would withdraw its ERC claim and not seek the $800,000 and would not need to pay its third-party provider $250,000.
Employers need to carefully analyze their ERC situation and seek sound advice in evaluating whether to withdraw their claim. As ERC updates continue to play out, please contact your Sikich tax advisor with any questions you have:
About our authors
Jim Brandenburg
Jim Brandenburg, CPA, MST, is a partner with extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.
Debbie Warden
Debbie Warden, CPA, is a tax director with more than 25 years of experience providing tax and accounting services to businesses and individuals with special attention to minimizing tax liabilities through tax planning, including tax credits and other incentives. Her background in both public accounting and industry gives her insight into the challenges faced by businesses and the strategies available to overcome them.
Tom Bayer
Thomas Bayer, CPA, CExP, is the market lead for the Indianapolis, Indiana region. He has 30 years of experience providing a broad range of accounting, tax and business advisory services to commercial clients across various industries.
