2023 Ultimate IRS ERC Guide: Claim Withdraw Program

The Internal Revenue Service (IRS) has announced a new program for business owners who improperly claimed the Employee Retention Credit (ERC). Under the IRS' ERC claim withdrawal program, eligible business owners can file to eliminate their ERC claims—and potentially avoid unwanted scrutiny from the IRS.

However, the IRS has made clear that withdrawing an invalid or falsely inflated ERC claim does not guarantee immunity from an audit (or even a criminal tax fraud investigation). As a result, business owners must ensure that using the ERC claim withdrawal program is their best option before they file. If it isn’t, there are other options available, and these options may provide the greatest opportunity to minimize the consequences of their mistake.

The IRS' ERC Claim Withdrawal Program: What Business Owners in New Jersey Need to Know

The IRS announced the ERC claim withdrawal program in response to concerns about scam artists and promoters targeting business owners with fraudulent ERC filing schemes. As the IRS wrote in its News Release:

“As part of a larger effort to protect small businesses and organizations from scams, the Internal Revenue Service today announced the details of a special withdrawal process to help those who filed an Employee Retention Credit (ERC) claim and are concerned about its accuracy.”

Scams targeting New Jersey business owners have typically offered to provide assistance with claiming the ERC in exchange for a fee, which is usually a portion of the business’ refundable credit. However, these “service providers” do not check business owners’ eligibility, and in many (if not most) cases, they falsely inflate businesses’ credit amounts.

Importantly, while the IRS' ERC claim withdrawal program is primarily intended to help those who fell victim to ERC filing scams, other business owners can file to withdraw their ERC claims as well. In this 2023 Ultimate IRS ERC Guide: Claim Withdraw Program, we explain everything business owners in New Jersey need to know about using (or not using) the program:

When Should a Business Consider Using the IRS' ERC Claim Withdrawal Program?

Businesses should consider using the IRS' ERC claim withdrawal program if they have concerns about the validity of their claims. The federal laws that created and extended the ERC during the COVID-19 pandemic placed strict limits on the credit’s availability and the rules for claiming (and calculating) the ERC changed significantly from 2020 to 2021.

The IRS allowed eligible businesses to claim the ERC retroactively—though it placed a moratorium on new claims in September 2023—so filing late isn’t necessarily a concern. However, if a business calculated the ERC incorrectly (whether knowingly or unknowingly) or worked with a third party to claim the credit, then it will likely be worth determining whether an ERC claim withdrawal is warranted.

The Employee Retention Credit was originally created under the CARES Act. The CARES Act made the ERC available to eligible businesses from March 13 through December 31, 2020. Under the CARES Act, businesses could claim the credit to offset a portion of their Social Security tax liability if they:

  • Experienced a “full or partial suspension of operations due to government order due to COVID-19 during any quarter;” or,
  • Experienced a “significant decline in gross receipts (beginning when gross receipts are less than 50% of gross receipts for the same calendar quarter in 2019 and ending in the first calendar quarter after the calendar quarter in which gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in 2019).”

For 2020, employers could claim 50 percent of their qualified wages (up to $10,000 per employee for the year), up to a maximum credit of $5,000 per employee for the year. However, there were special rules for large employers, and certain other restrictions applied.

The Relief Act extended the Employee Retention Credit through June 30, 2021. It also expanded the credit’s availability—allowing businesses to claim the credit if they experienced a “decline in gross receipts” (as opposed to a “significant decline in gross receipts”), which meant businesses could claim the credit for a quarter if their gross receipts were less than 80 percent of the same quarter in 2019. The Relief Act also created the “alternative quarter election rule,” which gave businesses the option to “look at prior calendar quarter and compare to the same calendar quarter in 2019 to determine whether there was a decline in gross receipts.”

For 2021, the Relief Act increased the maximum qualified wages to 70 percent (up to $10,000 per quarter) and increased the maximum credit to $7,000 per employee per quarter. The Relief Act adjusted many of the other rules and restrictions established by the CARES Act as well.

The American Rescue Plan Act (ARPA) and Infrastructure Investment and Jobs Act (IIJA) extended the ERC through the end of 2021, and they further revised the eligibility criteria and available credit amounts for the third and fourth quarters of the year. Most notably, ARPA established ERC eligibility for “recovery startup businesses,” which could claim a credit of up to $50,000 per quarter even if they did not meet the eligibility requirements for other employers.

If this seems complicated, this just scratches the surface of what business owners needed to know in order to properly claim the Employee Retention Credit. If you have concerns—whether based on your business’ ERC calculations or your business’ reliance on a third party—you should consult with a New Jersey tax lawyer about whether it makes sense to file under the IRS' ERC claim withdrawal program.

What Are the Requirements to Use the ERC Claim Withdrawal Program?

Not all businesses that claimed the Employee Retention Credit are eligible to file under the IRS' ERC claim withdrawal program. The IRS has established four strict eligibility criteria, and businesses that do not meet these criteria are ineligible to file even if they relied on a fraudulent third-party service provider to submit their ERC claims.

To take advantage of the IRS' ERC claim withdrawal program, a business must meet all four of the following criteria:

  • The business claimed the ERC on an adjusted employment return (IRS Form 941-X, 943-X, 944-X or CT-1X);
  • The business only used this return to claim the ERC (and not to claim any other adjustments);
  • The business intends to withdraw the entire amount of its ERC claim; and
  • The IRS has not paid the business' ERC claim (or if the IRS has issued a refund check, the business has not cashed or deposited the check).

If a business does not meet all four of these requirements, it cannot use the IRS' ERC claim withdrawal program. However, it may have other options available—and it may need to pursue one of these options promptly in order to mitigate its risk of facing civil penalties or criminal prosecution. Again, an experienced New Jersey tax attorney should be able to help, and business owners who have any concerns about their companies’ ERC claims should seek professional legal advice right away.

The IRS announced the ERC claim withdrawal program on October 19, 2023, and it has not yet announced the date on which the program will close. However, these types of programs tend to be limited in duration, so business owners should not expect that they will be able to withdraw their ERC claims indefinitely. Further, as the IRS and its federal law enforcement partners (including the U.S. Department of Justice (DOJ) and Federal Bureau of Investigation (FBI) are actively targeting ERC fraud, businesses that don’t address their invalid filings promptly may find themselves facing scrutiny that they could—and should—have avoided.

Should Businesses File Their ERC Claim Withdrawals Right Away?

With this in mind, business owners who need to withdraw their companies’ ERC claims will generally want to do so as soon as possible. There is no reason to wait, and waiting could prove costly. At the same time, business owners must be careful not to file for withdrawal if doing so is not their best option. This could be the case if either:

  • The business is not eligible to use the ERC claim withdrawal program (based on the four eligibility criteria listed above) or,
  • Filing for withdrawal could trigger scrutiny of other potential tax violations or lead to allegations of willful tax fraud.

So, while there is no reason to wait, an informed and cautious approach is required. Although the IRS is promoting the ERC claim withdrawal program as a tool for protecting businesses and taxpayers, the reality is that businesses (and their owners) can face liability regardless of why they improperly claimed or miscalculated the ERC. As we discuss in greater detail below, filing for withdrawal does not protect businesses (or their owners) from scrutiny. While business owners will generally benefit from proactively addressing their past tax filing mistakes, they must select the most advantageous means for doing so. In some cases, this will mean filing under the ERC claim withdrawal program—and in others, it will not.

The IRS' decision to target Employee Retention Claims is a concern for many business owners, and many business owners will be tempted to withdraw their claims right away. The last thing they need is to find themselves dealing with the IRS. Some business owners may even be tempted to withdraw their claims despite not having any concerns about their validity. But, regardless of the circumstances at hand, business owners should not rush to judgment. Instead, they should diligently work to assess their risk (if any), and then they should make informed decisions about the steps they need to take (if any) to avoid ERC-related scrutiny.

What is the Process for Using the IRS' ERC Claim Withdrawal Program?

Another key aspect of the IRS' ERC claim withdrawal program is that filing does not guarantee claim withdrawal. Instead, the IRS characterizes filings under the program as “requests.” As the IRS explains, after you file (if filing is your best option), it “will send you a letter telling you whether your withdrawal request was accepted or rejected.” As the IRS goes on to explain, “Our approved request is not effective until you have your acceptance letter from the IRS.”

This is yet another reason why business owners should carefully consider their options before filing under the IRS' ERC withdrawal program. The IRS is not simply processing ERC withdrawals but is instead scrutinizing withdrawal requests to determine if an audit or investigation may be warranted.

Assuming that filing a withdrawal request is a business owner’s best option, the process for filing a request depends on the circumstances at hand. The IRS outlines three primary scenarios:

1. The Business Hasn’t Received an ERC Refund and Hasn’t Been Notified that Its ERC Claim is Under Review

If a business hasn’t received an ERC refund and hasn’t been notified that its ERC claim is under review, the IRS advises taking the following steps to request claim withdrawal:

  • Make a copy of the adjusted return with the business' ERC claim;
  • Write “Withdrawn” in the left margin of the first page;
  • Have an authorized person sign, date, and write their name and title in the right margin of the first page; and,
  • Fax the signed copy to the IRS' ERC claim withdrawal fax line (855-738-7609) or mail it to the address in the instructions on the adjusted return.

If a business has claimed the ERC on multiple occasions (i.e., for the 2020 and 2021 tax years), it will need to submit a compliant copy of each relevant adjusted return. When submitting ERC withdrawal requests, the IRS recommends faxing for faster processing. It also notes that whichever submission method a business chooses, it should keep a copy of its filing and delivery confirmation.

2. The Business Hasn’t Received an ERC Refund But Has Been Notified that Its ERC Claim is Under Review

If a business hasn’t received an ERC refund but has been notified that its ERC claim is under review, the IRS advises against submitting a “Withdrawn” copy of the business' adjusted return by fax or mail. Instead, the agency instructs that in this situation, businesses should either:

  • Communicate with their examiner regarding their ERC claim withdrawal request; or,
  • If an examiner has not been assigned, respond to the audit notice with their withdrawal request using the instructions in the notice.

However, both of these options can be risky. Facing an IRS audit is a serious matter that can have serious financial consequences for businesses and business owners. When facing an audit, you do not want to make any decisions without carefully considering their potential consequences—and this is especially true when it comes to voluntarily submitting information to the IRS. If you are already facing an IRS audit, you should consult with a New Jersey tax attorney promptly, and your lawyer will be able to advise you about how best to deal with your business' ERC claim (or claims).

3. The Business Has Received an ERC Refund But Hasn’t Cashed or Deposited the Check

If a business has received an ERC refund but hasn’t cashed or deposited the check, the IRS advises annotating and signing a copy of the business' adjusted return as discussed above but states that the business should not fax its request in this scenario. Instead, the business should also write “Void” in the endorsement section of the refund check and “ERC Withdrawal” in the notes section, and then mail the adjusted return and voided check to:

Cincinnati Refund Inquiry Unit

PO Box 145500

Mail Stop 536G

Cincinnati, OH 45250

Importantly, even if the IRS accepts a business' ERC withdrawal request, this is not necessarily the end of the process. The IRS advises, “If your withdrawal is accepted, you may need to amend your income tax return. . . . If you need help, seek out a trusted tax professional.” If a business files an ERC withdrawal request but then fails to follow up with any necessary amended returns, this could trigger scrutiny from the IRS as well.

What Are the Risks (if Any) of Withdrawing an ERC Claim?

Are there risks involved with withdrawing an ERC claim? The short answer is “Yes.” As discussed above, the IRS' ERC claim withdrawal program allows eligible businesses to file requests for withdrawal. Approval is not guaranteed, and if a business that is not currently facing scrutiny files a withdrawal request that raises red flags, its filing could trigger an audit or investigation. As the IRS makes clear:

“Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose penalties or interest [though the business may need to file an amended return]. Those who willfully filed a fraudulent claim, or those who assisted or conspired in such conduct, should be aware that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.”

In other words, while the ERC claim withdrawal program offers a way for eligible business owners to mitigate their risk, the IRS is also using the program as a tool to identify and prosecute taxpayers suspected of fraud. With this in mind, filing an ERC claim withdrawal request can be risky, and, again, business owners must ensure that they are making informed decisions before they file.

Business owners also need to keep in mind that filing an ERC withdrawal request does not provide an immediate resolution. They must still wait to hear from the IRS to find out if their requests have been approved. If a business' withdrawal request is not approved for any reason, this is a situation that requires immediate attention. Likewise, if the IRS approves a business' withdrawal request, the business must ensure that it takes any and all necessary additional steps (i.e., filing an amended income tax return) to ensure full compliance with the Internal Revenue Code.

What Are the Risks (if Any) if a Business Doesn’t Withdraw Its ERC Claim?

While filing a request to withdraw an ERC claim presents certain risks, the risks of failing to address an invalid or falsely inflated ERC claim can be far greater.

The IRS, DOJ and FBI are all targeting businesses and business owners for ERC fraud. In September 2023, the IRSannounced that it had initiated 252 investigations involving more than $2.8 billion in suspected fraudulent ERC claims. Both of these figures are expected to increase significantly as these agencies continue to work together to uncover and prosecute ERC fraud. While proactive business owners will be able to protect themselves in many cases, those who aren’t will remain exposed to the risk of facing a tax audit or criminal tax fraud investigation.

Now that the IRS has publicized its ERC claim withdrawal program, it expects all business owners to reassess their ERC compliance and take appropriate steps to remedy any past filing mistakes. If a business owner fails to withdraw (or otherwise address) an invalid or falsely inflated ERC claim, knowing of the concerns that exist, this could lead to additional questions in the event of an audit or investigation. In this respect, the ERC claim withdrawal program is a double-edged sword. While it provides an opportunity for eligible business owners to avoid interest and penalties, it also provides an opportunity for the IRS to hold business owners accountable if they fail to take action.

What are the risks specifically? In the event of an audit, businesses that have improperly claimed the ERC can face liability for back taxes (including credit refund reimbursement), interest and penalties. If charged with intentionally submitting a fraudulent ERC claim, businesses and their owners can potentially face charges including:

  • Attempting to evade or defeat tax (26 U.S.C. Section 7201), which carries up to a $100,000 fine ($500,000 for corporations) and five years of imprisonment.
  • Willfully making or subscribing a fraudulent or false tax return (27 U.S.C. Section 7206), which carries up to a $100,000 fine ($500,000 for corporations) and three years of imprisonment.
  • Willfully submitting other fraudulent or false documents to the IRS (26 U.S.C. Section 7207), which carries up to a $10,000 fine ($50,000 for corporations) and one year of imprisonment.

Even these are just examples. The DOJ can use several federal statutes to prosecute ERC fraud, attempted ERC fraud, and conspiracy to commit fraud. Since combating ERC fraud is a top federal law enforcement priority, the DOJ is seeking to make an example out of defendants in many cases. As a result, the risks of facing criminal charges for willful ERC fraud are very real, and these are risks that business owners should seek to avoid by all means available.

Options for Businesses that Aren’t Eligible for ERC Claim Withdrawal

Let’s say you have concerns about your business' ERC claim, but your business is not eligible to take advantage of the IRS' ERC claim withdrawal program. What are your options in this scenario?

1. Filing an Amended Return

According to the IRS, “[t]axpayers who are not eligible to use the withdrawal process can reduce or eliminate their ERC claim by filing an amended return.” As the IRS further explains in its Employee Retention Credit FAQs, if a business needs to reduce the amount of its ERC claim or make additional corrections to its adjusted return, it should:

“Prepare a new adjusted return (Form 941-X, Form 943-X, Form 944-X, Form CT-1X) with the correct amount of ERC and any other corrections for that tax period[, and m]ail the new adjusted return to the IRS using the address in the instructions for the form that applies . . . .”

However, just like filing a request for ERC claim withdrawal, this option can be risky in some circumstances. Fixing a past filing mistake via an amended return does not prevent the IRS from opening an audit or investigation—in fact, amended returns will trigger IRS scrutiny in many cases.

Filing an amended return may involve paying back taxes, interest and penalties as well. While some businesses will be able to afford to pay what they owe, others will not. If your business cannot meet its federal tax obligations, you may need to work with a tax lawyer to seek a settlement agreement or submit an Offer in Compromise in parallel with submitting an amended return.

2. Submitting a Voluntary Disclosure

Submitting amended filings can be especially dangerous for business owners who have willfully underpaid their tax liability (including by fraudulently claiming the Employee Retention Credit). Willful tax evasion is a federal crime, and it can lead to charges including (but not limited to) those listed above. If an amended filing leads the IRS to evidence of willful tax fraud, it may refer the taxpayer’s case to its Criminal Investigation Division (IRS CI) for enhanced scrutiny.

In this scenario, the best option might be to submit a voluntary disclosure. IRS CI administers a Voluntary Disclosure Program that is intended as a mechanism for taxpayers to mitigate the consequences of willful and intentional tax law violations.

As IRS CI explains, “[a] voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.” Thus, similar to filing an ERC claim withdrawal request or an amended return, submitting a voluntary disclosure does not necessarily provide complete protection. However, by working with experienced tax counsel to submit their voluntary disclosures, business owners will often be able to achieve resolutions that allow them to move on without fear of being served with a search warrant or grand jury subpoena.

If you think that submitting a voluntary disclosure may be necessary, you should consult with a New Jersey tax lawyer before you submit any information to the IRS or IRS CI. Voluntary disclosures require a very careful approach. Failure to follow any of the requisite procedures can prevent business owners from securing the protections that may otherwise be available.

Options for Businesses that Are Facing an IRS Audit or IRS CI Investigation

Submitting a voluntary disclosure is only an option before the IRS initiates an audit or IRS CI initiates an investigation. Likewise, as discussed above, submitting an ERC claim withdrawal request can be risky when you are already facing IRS scrutiny. So, what are your options if the IRS (or IRS CI) is already looking into your business' ERC claim?

In this scenario, you will need to work closely with experienced tax counsel to formulate a sound defense strategy. Whether this means disputing any allegations of fraud or working to negotiate a resolution that avoids criminal charges will depend on the circumstances involved. When facing scrutiny from the IRS (or IRS CI), informed decision-making is critical, and you need to ensure that you are presenting an effective defense that is designed to protect you to the fullest extent possible.

Can (and Should) Businesses Still Claim the ERC? 

While many business owners are in the position of needing to decide whether to withdraw their ERC claims, many eligible businesses haven’t yet filed. If your business has not claimed the ERC, is it already too late?

Not exactly.

Broadly speaking, the Employee Retention Credit program is still open. Even though the ERC was only available during the 2020 and 2021 tax years, eligible businesses can still file retroactively. However, the IRS has placed a moratorium on new claims as of September 14, 2023. When the IRS announced the moratorium, it stated that the moratorium would last “through at least the end of the year.” As a result, eligible businesses that haven’t yet claimed the ERC should check for updates in 2024—and when the ERC program reopens, they should consult with their tax counsel to ensure that their filings fully comply with all applicable requirements.

Answers to FAQs About the ERC Claim Withdrawal Program for Businesses

Is it safe to withdraw my business' ERC claim if it was inaccurate?

The IRS' ERC claim withdrawal program allows eligible business owners to withdraw their ERC claims without facing liability for interest or penalties. However, this outcome is not guaranteed for all filers. The IRS must approve a business' ERC withdrawal request for any applicable interest and penalties to be waived. Additionally, if the IRS determines that a business willfully filed an invalid or falsely inflated ERC claim, the business' withdrawal request could trigger an audit or investigation.

How long do businesses have to file withdrawal requests under the IRS' ERC claim withdrawal program?

The IRS has not yet announced a closing date for the ERC claim withdrawal program. Even so, business owners who need to withdraw their companies’ claims will want to file promptly. Before filing, however, business owners must ensure that both (i) their businesses are eligible and (ii) filing is the best option. Other options are available, and business owners may be better off pursuing these other options in some cases.

Does withdrawing an ERC claim guarantee that I won’t face an audit or investigation?

No, withdrawing an ERC claim does not guarantee that you won’t face an audit or investigation. The IRS has made this clear. To make informed decisions about how to resolve issues related to their companies’ ERC claims, business owners should consult with experienced tax counsel prior to filing.

Should I talk to a New Jersey tax lawyer before filing a request under the IRS' ERC claim withdrawal program?

Yes, business owners who are thinking about filing requests under the IRS' ERC claim withdrawal program should talk to a tax lawyer before doing so. There are several reasons why, including:

  • Business owners need to confirm whether their businesses properly claimed the ERC for all relevant quarters in 2020 and 2021;
  • Business owners need to confirm whether they are eligible to file withdrawal requests under the ERC claim withdrawal program and,
  • Business owners need to consider all available alternatives before filing a request to withdraw an invalid ERC claim.

When you contact us, we will arrange for you to speak with an experienced tax lawyer in New Jersey one-on-one. Your lawyer will work with you to review all relevant documentation, and then your lawyer will help you make informed decisions about your next steps.

How do I know if I should file a request to withdraw my business' ERC claim?

Due to the complexity of the Employee Retention Credit and the eligibility criteria under the IRS' ERC claim withdrawal program, deciding whether to file a withdrawal request is not easy. An experienced tax lawyer can help, and to ensure that you do not put yourself (or your business) at risk for unnecessary consequences, you should consult with an experienced New Jersey tax lawyer promptly.

Discuss Your Business’ ERC Claim with New Jersey Tax Lawyer Kevin E. Thorn

Located at 301 Route 17 North, Suite 800, Rutherford, New Jersey 07070, New Jersey tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, represents business owners and their companies in all IRS matters. If you have questions about the IRS' ERC claim withdrawal program, call 201-842-7696 or contact us online to arrange a confidential consultation.

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