Signs you should consider withdrawing your employee retention tax credit claim

February 17, 2024

Tax laws are full of unintended consequences. That became painfully clear during the COVID-19 pandemic, when a variety of tax relief provisions were created to help individuals and businesses deal with the virus' economic effects.

Such was the case with the Employee Retention Credit, or ERC.

"The ERC provided a financial lifeline to millions of businesses and exempt organizations during the pandemic," said IRS Commissioner Danny Werfel in his prepared testimony for the Feb. 15 hearing before the House Ways and Means Committee.

"The IRS has worked hard to implement this credit, and we have processed about 3.6 million ERC claims worth approximately $230 billion to businesses," said Werfel. "However, promoters have been aggressively misleading people and businesses that are not eligible into claiming the ERC, even though they do not qualify."

IRS efforts to combat ERC fraud: Werfel also noted the steps the IRS has taken to combat dubious ERC claims. They include —

A moratorium since last September on questionable ERC claims.
Issuance of letters in December to more than 20,000 businesses notifying them of disallowed claims.
Creation of a withdrawal option for businesses with a pending ERC claim that might not be qualified.
Implementation of a special ERC Voluntary Disclosure Program running through March 22, 2024.

The withdrawal option allows certain employers that filed an ERC claim, but who have not yet received a refund, the ability to recall their submission and avoid future repayment, interest, and civil penalties on a refund for which they are ineligible. Claims that are withdrawn will be treated as if they were never filed.

The ERC Voluntary Disclosure Program allows businesses that are accepted into the program to repay an improper credit and avoid additional ramifications. Even better, the repayment amount is just 80 percent of the improper credit they received.

Werfel elaborates on the IRS' ERC actions in his written testimony. That's why it's the first of this weekend's three IRS items that get Saturday Shout Outs.

Questionable ERC warning signs: The second shout goes out to the IRS' announcement of seven suspicious signs an ERC claim could be incorrect. The release elaborates on the signs, but here are the basic points:

Too many quarters being claimed.
Government orders that don't qualify.
Too many employees and wrong calculations.
Business citing supply chain issues.
Business claiming ERC for too much of a tax period.
Business didn't pay wages or didn't exist during eligibility period.
Promoter says there's nothing to lose.

Business owners who are concerned their ERC might not pass IRS inspection should review the warning signs as soon as possible. That will give them time to meet the March 22 deadline for withdrawing it.

"Many businesses were wildly misled about the [ERC] qualifications, and the IRS is taking a special step to highlight common problems being seen about these claims," said Werfel. "The IRS urges ERC claimants to get with a trusted tax professional and review their qualifications before time runs out on IRS disclosure and withdrawal programs. The 'suspicious seven' signs released today are clear red flags that ERC claimants should carefully review."

Withdrawing an ERC claim: Finally, if you find you do need to pull your ERC claim, check out this weekend's third IRS-related Saturday Shout Out, the agency's special claim withdrawal process page.

And, in following Werfel's recommendation to get ERC professional guidance, a bonus shout out goes to Stephanie Doughty and Kathleen King of Alvarez & Marsal for their article on Navigating the Employee Retention Credit Voluntary Disclosure Program.

You also might find these Don't Mess With Taxes ERC items of interest: