The IRS has repeatedly warned taxpayers of a surge in aggressive marketing of questionable or fraudulent Employee Retention Credit (ERC) claims. The IRS initially took action on ERC claims by including them on their Dirty Dozen list, and later, on September 14, the IRS implemented an immediate moratorium on processing new claims through at least 2023. 

The IRS now is offering a way out for taxpayers who fell victim to ERC scams, but who have not yet received their refunds. On October 19, 2023, the IRS announced a withdrawal process for ERC claims, which is a special initiative aimed at helping businesses concerned about an ineligible claim. According to the IRS:

"This new withdrawal option allows certain employers who filed an ERC claim, but have not yet received their refund to withdrawal their submission and avoid future repayment, interest and penalties. Employers who submitted an ERC claim that's still being processed, can withdraw their claim and avoid the possibility of getting a refund for which they're ineligible."

Who is Eligible to Withdraw and ERC Claim?

All of the following must apply before an employer can use the ERC claim withdraw process:

1. The employer made the claim on an adjusted employment tax return (Forms 941-X, 943-X, 944-X, CT-1X).
2. The employer filed the adjusted return only to claim the ERC, and made no other adjustments.
3. The employer wants to withdraw the entire amount of the ERC claim.

Whether the entire amount of the ERC claim is withdrawn is analyzed on a quarter-by-quarter basis. For example, a business may have legitimately qualified for the ERC for Q1 2021, but not for Q2 or Q3 2021 even though it claimed it for all three quarters. The employer is only required to withdraw the entirety of Q2 or Q3 2021. The withdrawal procedure does not require the employer to withdraw the claim for Q1 2021 as well. Therefore, an employer should first determine what quarters it did not qualify for the ERC before it withdraws its claim.

How to Withdraw Your ERC Claim(s)?

The IRS has provided specific instructions to withdraw ERC claims. The process varies depending on the status of the ERC claim:

Status 1: You Have Not Received a Refund and Have Not Been Notified Your Claim is Under Audit

1. Make a copy of the adjusted return (e.g., 941-X) with the claim you wish to withdraw.
2. Write "Withdrawn" in the left margin of the first page. 
3. Have an authorized person sign and date the right margin of the first page (authorized persons are listed in Q3 of ERC FAQs) and write their name and title next to their signature.
4. Fax the signed copy of your return to the IRS's ERC claim dedicated withdrawal fax line at 855-738-7609. Individuals without a fax can mail the adjusted return to the address in the instructions for the return.

Status 2: You Have Not Received a Refund and You Have Been Notified Your Claim is Under Audit

The steps are the same as described for Status 1, but you are required to fax/mail the request to a different location. Specifically:

1. If you have been assigned an examiner, ask your examiner about how to fax or mail your withdrawal request directly to them.
2. If you haven't been assigned an examiner, respond to your audit notice with your withdrawal request using the instructions in the notice for responding.

Status 3: You Received a Refund Check but Have Not Cashed or Deposited it

1. Prepare the claim withdrawal request using the steps in Status 1, but do not fax the request.
2. Write "Void" in the endorsement section on the back of the refund check.
3. Include a note that says, "ERC Withdrawal" and explain the reason for returning the refund check.
4. Make copies for your tax records of everything - the front and back of the voided check, the explanation notes and the signed and dated withdrawal request page.
5. Don not staple, bend or paper clip the voided check; include it with your claim withdrawal request and mail it via certified mail to the IRS at:

Cincinnati Refund Inquiry Unit
PO Box 145500
Mail Stop 536G
Cincinnati, OH 45250

    6. Track your package to confirm delivery.

After review of the request, the IRS will inform you by letter whether your request was accepted or rejected. An approval request is not effective until you have been notified by the IRS of acceptance.

Status 4: You Received a Refund Check and Have Cashed or Deposited it

The withdraw option does not allow for the withdrawal of a claim with respect to which a refund check has been cashed or deposited. However, the IRS has indicated there may be a program for this scenario in the near future.

If you have concerns regarding the validity of your ERC claim or need assistance with the withdraw process please contact Munsch Hardt Shareholder Susan Sample or David Roth.