The IRS's ongoing effort to address the flood of improper Employee Retention Credit claims took another step forward in mid-2024 with the announcement of a streamlined withdrawal process for businesses with pending ERC claims that have not yet been processed. For businesses that filed ERC claims based on aggressive promoter advice and now have second thoughts, the withdrawal process offers a clean exit — no repayment, no penalties, and no interest — so long as the claim has not already been paid.^[1]

Background: The ERC Problem

The Employee Retention Credit was enacted as part of the CARES Act in 2020 to help businesses retain employees during the COVID-19 pandemic. Eligible employers could claim a refundable credit against employment taxes for wages paid to employees during periods of full or partial government-ordered suspension of operations or during quarters in which the employer experienced a significant decline in gross receipts.^[2]

What followed was an unprecedented wave of aggressive promotion. Third-party promoters — many of whom had no tax expertise — solicited businesses with promises of large refunds, often charging contingency fees of 20 to 30 percent of the claimed credit. The IRS received millions of ERC claims, many of which the agency believes are improper. In September 2023, the IRS imposed a moratorium on processing new ERC claims while it developed a strategy to address the backlog.^[3]

The Withdrawal Process

The ERC claim withdrawal process is available to businesses that meet all of the following criteria: the claim was filed on an adjusted employment tax return (Form 941-X, 943-X, 944-X, or CT-1X); the adjusted return was filed only to claim the ERC and no other adjustments were made; the business wants to withdraw the entire ERC claim for the period; and the IRS has not yet paid the claim, or the IRS issued a refund check but the business has not cashed or deposited it.

To initiate a withdrawal, the business makes a copy of the adjusted return containing the ERC claim, writes "Withdrawn" in the left margin of the first page, has an authorized person sign and date the copy, and faxes it to the IRS at the designated ERC withdrawal fax line. The IRS treats the withdrawn claim as though it was never filed. No penalties or interest will be assessed, and if the business paid a promoter fee, the withdrawal may support a claim to recover that fee.

Withdrawal vs. the Voluntary Disclosure Program

The withdrawal process should not be confused with the ERC Voluntary Disclosure Program, which is designed for businesses that have already received and cashed ERC payments. Under the VDP, businesses must repay 80 percent of the credit received (keeping 20 percent, which is intended to approximate the promoter fee the business cannot recover). The VDP also requires the business to provide information about the promoter who facilitated the claim.^[4]

For businesses that have not yet received payment, the withdrawal process is clearly the better option. It results in no tax liability, no repayment obligation, and no promoter-related reporting requirement. Businesses that have already received and deposited their ERC refunds do not have the withdrawal option and should evaluate the VDP as an alternative to waiting for an IRS audit.

What Businesses Should Do Now

Businesses with pending ERC claims should carefully evaluate whether their claims are supportable. The IRS has identified several common indicators of improper claims, including claims based on supply chain disruptions that did not actually prevent the business from operating, claims for periods when the business was not subject to a government order, and claims that improperly count wages paid with Paycheck Protection Program loan funds.

For businesses that determine their claims are not supportable — or that are simply unwilling to bear the audit risk — the withdrawal process provides a straightforward resolution. The sooner the withdrawal is filed, the sooner the matter is closed. Businesses that wait until the IRS begins processing their claims and issues a denial may face a more complicated path, potentially involving penalties and interest on the disallowed credit.