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IRS allows businesses to withdraw improper ERC claims

Small businesses' many challenges were multiplied during the COVID-19 pandemic. The Employee Retention Credit (ERC) helped many companies and their workers make it through that lean time. But recently, unscrupulous promoters have pushed some owners to improperly claim the ERC, creating new problems. Now the IRS is offering a way to correct those bad filings. (Image via Unsplash+ in collaboration with Getty Images)

The Employee Retention Credit (ERC) helped lots of small businesses and their staff make it through the COVID-19 pandemic.

When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees while their business operations were fully or partially suspended due to a government coronavirus closure order.

The ERC also is available to businesses that suffered a significant decline in gross receipts during the eligibility claim periods.

Then scammers got involved.

Flood of questionable ERC promotions: The ERC is a complex credit, and businesses must meet precise requirements to get it. Aggressive marketers advertised as ERC experts, telling companies they still could apply and get the tax break.

Too often, those tax break promises just weren't true.

The IRS had received as of mid-September approximately 3.6 million claims for the credit since it became available. Many of those, however, have arrived since the questionable promoters got involved, swamping the IRS with ERC claims.

Facing the added oversight of potentially ineligible claims, the IRS decided last month to temporarily stop processing new ERC claims.

No harm, no foul withdrawals: Last week, the IRS took another step to stem false ERC claims.

The tax agency announced that business owners with doubts about their yet-to-be-paid ERC claims can withdraw them.

The IRS' position is that these withdrawn claims will be treated as if they never happened.

That way, notes the IRS, businesses that did submit an ERC but then withdrew it will avoid potential penalties and interest on refunds that were created through the potential improper filings.

"The IRS is committed to helping small businesses and others caught up in this onslaught of Employee Retention Credit marketing," said IRS Commissioner Danny Werfel in announcing the withdrawal option.

"The aggressive marketing of these schemes has harmed well-meaning businesses and organizations, and some are having second thoughts about their claims. We want to give these taxpayers a way out," Werfel added.

The IRS is also working on guidance to help employers that were misled into claiming the ERC and have already received the payment. More details will be available this fall.

Who can ask to withdraw an ERC claim: Business owners who filed a possibly improper ERC claim and want to take it back, can.

To do so, an employer must meet the following four conditions.

  1. They made the claim on an adjusted employment return. Those are Forms 941-X, 943-X, 944-X, or CT-1X.

    The 941-X shown here, as well as the other ERC claim forms, are this weekend's By the Numbers figures. See more tax forms and more about them at Tax Forms 2023.

  2. They filed the adjusted return only to claim the ERC, and they made no other adjustments
  3. They want to withdraw the entire amount of their ERC claim.
  4. The IRS has not paid their claim, or the IRS has paid the claim, but they haven't cashed or deposited the refund check.

If you can't use the ERC claim withdrawal process, the IRS says you should file an amended tax return to reduce or eliminate their original wrong claim. Details are in the amending an ERC return section of the IRS' online frequently asked ERC questions.

How to withdraw an ERC claim: OK, you can withdraw your ERC filing. The full steps to do so are detailed on the IRS' special ERC claim withdrawal page.

Here are the highlights of that process.

  • Taxpayers whose professional payroll company filed their ERC claim should consult with the payroll company. The payroll company may need to submit the withdrawal request for the taxpayer, depending on whether the taxpayer's ERC claim was filed individually or batched with others.
  • Taxpayers who filed their ERC claims themselves, haven't received, cashed, or deposited a refund check and have not been notified their claim is under audit should fax withdrawal requests to the IRS using computer or mobile device. The IRS has set up a special fax line to receive withdrawal requests. This enables the agency to stop processing before the refund is approved. Taxpayers who are unable to fax their withdrawal using a computer or mobile device can mail their request, but this will take longer for the IRS to receive.
  • Employers who have been notified they are under audit can send the withdrawal request to the assigned examiner or respond to the audit notice if no examiner has been assigned.

Those who received a refund check, but haven't cashed or deposited it, can still withdraw their claim. Mail the voided check with the withdrawal request using the instructions at, again, the ERC withdrawal page.

Stay alert: Unfortunately, scammers already have adjusted their tactics in light of the recent IRS ERC actions.

Some are pushing employers who submit an ERC claim into agreeing to costly up-front loans in anticipation of a refund, says the IRS.

Don't fall for these high-pressure scams. My earlier post has tips on what business owners should look at in ERC promotions. The IRS also lists some warning signs of ERC scams.

Also review the IRS' ERC eligibility checklist. And, of course, talk with a reputable tax professional about filing for or withdrawing a claim for the ERC.

You also might find these items of interest:



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