IRS Lets Businesses Take a Mulligan for with Bad ERC Claims

False employee retention credit (ERC) claims have been in the IRS’ spotlight for months now. The employee retention credit is a relatively new credit designed to help employers who kept employees on their payroll during government-ordered shutdowns during the COVID-19 pandemic. The complexity of the credit itself has caused many employers to question whether they’re eligible. Post-pandemic, aggressive promotors promising impossible returns have seemingly had great success in convincing innocent employers to file inaccurate ERC claims—prompting the IRS to initiate a process that will allow ineligible taxpayers to withdraw erroneous ERC claims.

Employers who submitted ERC claims that they now believe to be inaccurate will be able to withdraw those claims if the claim is still being processed (note that the IRS halted processing new ERC claims back in September). Employers who have questions about the accuracy of their ERC claim should review the details carefully to determine whether to take advantage of the new withdrawal option.

Withdrawing Erroneous ERC Claims

The IRS has provided new details about a withdrawal process for taxpayers who filed employee retention tax credit (ERC) claims that they now believe to be erroneous.

Employers can use the withdrawal process if the following things are true: (1) they made the claim on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X), (2) they withdraw the entire amount of the ERC claim, (3) the amended return was filed solely to claim the ERC and (4) the IRS has not paid their claim, or if they have, the taxpayer has not cashed/deposited the IRS' refund check. Taxpayers who are not eligible to withdraw a claim can still file an amended return to reduce or eliminate the ERC claim.

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 can fax or mail withdrawal requests to the IRS (a special fax line has been set up and details are available at IRS.gov/withdrawmyERC). Taxpayers who use professional payroll companies should contact the payroll company (the payroll company may need to submit the withdrawal request on the taxpayer’s behalf).

Taxpayers who are under audit can send the withdrawal request to their examiner or in response to their audit notice (if an examiner has not been assigned).

Claims that are properly withdrawn will be treated as though they were never filed, and no interest or penalties will apply. However, the IRS guidance specifically stated that taxpayers who willfully filed fraudulent claims (or assisted others in filing fraudulent claims) should know that withdrawing the claim will not exempt them from criminal investigations.

Current Treatment of False ERC Claims

The penalties for Most ERC claims are filed on Forms 941. The statute of limitations for IRS challenges to Forms 941 is three years. However, the three-year period does not start to run until April 15 of the calendar year following the year in which the form is filed (i.e., the statute of limitations for 2020 Forms 941 started to run on April 15, 2021 and will expire April 15, 2024).

There is also a special limitations period for the third quarter of 2021. That statute of limitations does not expire until April 15, 2027. Further, proposals would apply the special, longer statute of limitations to any period in which the ERC was available. Taxpayers who received ERC refunds should also be aware that the IRS can challenge the payment in court within two years of the date the refund was paid (five years if the taxpayer obtained the refund based on fraud or misrepresentation).

Under IRS final regulations released in 2023, erroneous refunds of COVID-19-related credits will be treated as underpayments of tax under IRC Sections 3111(a) or (b). Both assessment and administrative collection procedures may apply.

Even if third-party payers claimed the credit on behalf of the common law employer, the common law employer client itself remains liable for the erroneous refunds of these tax credits.

Conclusion

The new withdrawal process is designed to help small business owners who have been pressured or misled avoid filing a false claim. Taxpayers who are concerned about the accuracy of their ERC claim should examine the withdrawal process to determine whether they’re eligible.

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