New IRS Process: How to Withdraw Employee Retention Credit (ERC) Claims
Since its inception with the CARES Act in 2020, the Employee Retention Credit (ERC) has remained a pivotal point of discussion for employers, shaping tax strategies and financial decisions.
While the Employee Retention Credit has provided much-needed relief to employers grappling with payroll challenges during the pandemic’s peak, the past year has witnessed a concerning surge in IRS-related tax scams linked to fraudulent ERC claims.
Here, we’ll delve into what the ERC entails, why it’s become a ‘hot-button’ issue, and the crucial significance and procedure for withdrawing claims from the IRS.
The Basics – What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a refundable tax credit available to certain eligible employers. It is important to note that not every business qualifies for this credit, and the amount of the claim varies depending on the period for which it is requested.
During the period from March 31, 2020, to September 30, 2021, businesses had the opportunity to claim this credit, with adjustments made to the eligibility criteria during this time. This information is particularly crucial for businesses seeking to submit retroactive claims.
This timeframe marks the beginning of many challenges associated with the ERC program.
Issues and Fraud Surrounding the ERC
The Employee Retention Credit (ERC) program has provided significant benefits to many businesses that may not have survived the financial impact of the pandemic otherwise. However, along with these benefits, there have been some issues. Some businesses have mistakenly filed ERC claims for which they are not eligible, due to errors and misunderstandings.
In response to the ERC program, numerous third-party entities have emerged to assist businesses in filing their Employee Retention Credit claims. While many of these entities are legitimate and provide valuable support to eligible businesses, there are also questionable entities that are filing claims without regard to the IRS eligibility criteria.
The IRS is actively working to address and differentiate between fraudulent claims and those made in error due to eligibility misunderstandings. These efforts have reportedly incurred costs of nearly 1 billion dollars.
Who is Eligible to Withdraw their ERC Claim?
There are some stipulations when it comes to withdrawing an ERC claim that was already submitted to the IRS. To successfully submit a claim, you must meet all of the following criteria:
- The claim was made using an adjusted employment tax return. A common example of this is the Form 941-X (filed to amend certain information on Form 941)
- The adjusted return was filed for the sole purpose of making an ERC claim, no other amounts on this return were adjusted.
- You plan to withdraw the entire amount of the ERC claim.
- The IRS hasn’t paid your claim yet, or the IRS has issued you a refund check but you haven’t cashed or deposited it.
What is the IRS Process for Withdrawing an ERC Claim?
That being said, the IRS is offering an option for businesses to withdraw their ERC claims. Therefore, if you’ve submitted a claim for an ERC credit and after further investigating the eligibility requirements, you find that the claim is invalid, you can withdraw your claim using this IRS process.
The steps you will follow for withdrawing your claim will depend on where you are in the ERC claim process. The IRS outlines the following scenarios:
- Your business has not received a refund AND you have not been informed by the IRS that your claim is under audit
- Your business has not received a refund, BUT you have been notified by the IRS that your claim is under audit
- Your business has received a refund check, BUT it has not been cashed or deposited
Now, let’s take a closer look at the withdrawal process for each.
Businesses with No Refund and No Audit Notification
First things first, make a copy of the amended return, the IRS requires this to be a Form 941-X, 943-X, 944-X, or CT-1X. If you submitted adjusted returns for multiple tax periods, you need to follow these steps separately for each period you want to withdraw from.
- On the copy of the adjusted tax return, write ‘Withdrawn’ in the left-hand margin.
- On the right side of the form, provide the name and title of the person that it authorized to sign tax forms on the business’s behalf. Then, this person should sign and date this.
- The IRS will accept this submission via fax, at 855-738-7609. This fax line is dedicated to ERC claim withdrawals and should be the only one used for this purpose. The mailing address for submitting withdrawal requests can be found in the instructions for the adjusted return.
Businesses with No Refund and A Claim Under Audit
If your business is at this stage in the claims process, you should follow all the steps mentioned above until you reach the point of mailing/faxing the form. The method of submitting the withdrawal is the only part of the process that will differ.
If you are already in communication with an assigned IRS examiner regarding your claim, you should inquire about the next steps for completing the withdrawal process.
If you are not already in touch with an IRS examiner, you should respond to your audit notice with the withdrawal request. Additionally, consider reaching out to the IRS to request guidance on the withdrawal process.
Businesses with a Refund they haven’t Cashed/Deposited
If your business is at this stage in the claims process, you should follow all the steps mentioned above until you reach the point of mailing/faxing the form. At this point, you will need the refund check that you received. Write ‘Void’ where the check would be endorsed.
The IRS requires you to include a note that indicates that you are withdrawing the ERC claim. All of this information should be complied and mailed to this address provided by the IRS:
Cincinnati Refund Inquiry Unit
PO Box 145500
Mail Stop 536G
Cincinnati, OH 45250
As always, if you have specific tax questions related to your claims and business, reaching out to a certified tax preparer or CPA is best practice. Our team is happy to assist you throughout the 941 filing process, and we support the completion of Form 941-X, however, we do not advise on the Employee Retention Credit or any related claims.
For more information on the ERC and this process, check out the IRS guidance here.
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