Tax Alert: The IRS Releases an ERC Claim Withdrawal Process

At a glance:

• The main takeaway: On October 19th 2023 the IRS released a new program allowing certain businesses that incorrectly filed for an ERC refund to withdraw their claims without penalty.
• Impact on your business: In the event you filed for ERC and the claim is a) still pending b) you have received but not cashed the refund check or c) are under IRS audit for the ERC claim, provided your business did not file fraudulently, you can withdraw the claim without penalty and with no future audit risk.
• Next steps: The IRS has provided specific next steps to take dependent upon your specific fact pattern.

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The full story:

On October 19, 2023, the IRS announced an Employee Retention Credit (ERC) withdrawal program, providing businesses that previously applied for the ERC and that have not received or cashed their refund checks the ability to withdraw their claim without facing future penalties related to their filing. This withdrawal process is designed to allow employers who have uncertain ERC eligibility positions — particularly if they utilized a “credit mill” or another unqualified provider — to come forward and withdraw a pending claim or uncashed refund check. Note that the IRS release indicates that a similar program will be forthcoming for businesses that filed for the credit and have cashed the refund checks.

In the release, the IRS provides an explanation for its decision to allow for withdrawal of previously filed claims:

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.

Which businesses are eligible to utilize the ERC withdrawal program?

Businesses must meet several specific factors to reach the eligibility threshold of the ERC withdrawal program. All of the below must be met for eligibility:

• The business must have made the claim on an adjusted employment tax return, typically a Form 941-X, rather than on an original Form 941.
• The amended return must have been adjusted only for the ERC refund claim, without any additional adjustments.
• The business must intent to withdraw the entire claim for the period of the return.
• The IRS must not have paid the claim (i.e., sent the taxpayer a refund check), or the IRS has paid the claim but the check for the covered period must not have been cashed/deposited.

Note that if the business willfully filed a fraudulent claim or conspired to do such, the withdrawal program does not relieve the business of potential legal action.

Also, if the business was a client of a Professional Employer Organization (PEO) during the period of the refund request and the PEO filed the adjusted return to claim the benefit, the business must consult with the PEO on its ability to enter into the withdrawal program.

How does an employer request an ERC withdrawal?

The process for withdrawal differs depending on the status of the refund. In all cases, a copy of the amended return (Form 941-X) that was provided in requesting the ERC refund must be adjusted by:

• Writing “Withdrawn” in the left margin of the first page, and
• Adding an authorized person’s name and title in the right-side margin, followed by that person’s signature and the date of signing. Note that an authorized person is generally an owner, officer or partner.

If the business is filing the claim when a refund check has not yet been issued, the Form 941-X adjusted as per the above should be faxed to the IRS at 855-738-7609.

If the business is filing the claim with the uncashed refund check in-hand, then it should write “VOID” in the endorsement section on the back of the check and send the check and the adjusted Form 941-X to the following address, via USPS certified mail. Make a copy of the complete package before submitting:

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

If the business is filing the claim when a refund check has not yet been issued but you have been notified that the business is under audit, follow the below:

• If you have been assigned an examiner, communicate with the examiner on next steps.
• If you have not been assigned an examiner, respond to the audit notice with the withdrawal request as per the notice instructions.

The bottom line

Since the beginning of the ERC program, legislators and the IRS have not provided clear guidance on the rules surrounding the eligibility process, which may have opened the door to abuse in the system. The IRS has regularly acknowledged the challenge with respect to these abuses, as well as confusion that may have been caused due to the lack of clarity on certain eligibility criteria.

The IRS withdrawal process has been designed to allow businesses with uncertainty about their ERC position to return funds that they may not have been eligible to receive without the risk of penalties or interest being applied to returned amounts. According to the IRS, “[c]laims that are withdrawn will be treated as if they were never filed.”

Further, the IRS intends to roll out a withdrawal process for businesses that cashed their refund checks sometime in the near future, though a specific release date has not been announced as of the writing of this alert.

How Aprio can help

Aprio was at the forefront of helping clients navigate pandemic-era programs like the ERC, and we stand ready to help business owners dealing with this new process released by the IRS. Since the inception of the ERC program, Aprio has prepared over 4,400 refund claims for employers. Our standards track to the eligibility requirements, and our approach has been conservative in approving business owners for the credit. That means we do turn down many potential ERC clients because we do not believe they have a path to eligibility.

With that being said, we know that many innocent business owners will be caught in the ERC audit web — which is why we have developed a strong team to assist businesses in this withdrawal process by preparing the proper documents, providing instructions for submission, and tracking acceptance of the withdrawals within the IRS.

If you need a trusted CPA and accounting team to help you file for the ERC, withdraw active claims or manage ERC audits, schedule a consultation with Aprio today.