Employee Retention Tax Credit Claim: How to Avoid IRS Penalties

Employee retention tax credit written on form next to notebooks on a desk — (Image credit: Getty Images)

The ERC Voluntary Disclosure Program allowed eligible businesses to repay incorrect ERC claims at a discounted rate of 80%. The IRS suspended the program on March 22, 2024. However, the agency has said it could reopen the program and other options to fix incorrect claims remain available.

When claimed properly, the ERC (or ERTC) is a complex refundable tax credit available to certain employers who paid employees during the COVID-19 pandemic. However, abusive tax promoters have encouraged small businesses to file fraudulent claims for the credit.

The IRS has identified more than 22,000 incorrect ERC claims, and the ERC claims withdrawal process, which is still available to businesses with unprocessed claims, as of March had led to 1,800 entities withdrawing $251 million.

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IRS ERC claim withdrawal process

The ERC withdrawal process and the initial round of disallowance letters came after the IRS stopped processing new ERC claims in 2023. That moratorium on new claims processing and the ERC claim withdrawal process is part of a larger effort at the agency to protect small businesses and organizations from scams.

Which businesses can withdraw an ERC claim?

Claiming an illegitimate ERC claim can result in interest, penalties, and repayment of the tax credit amount. But in some cases, withdrawing the claims can avoid those consequences.

But note: The IRS says, “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.”

And not all business owners are eligible to withdraw a previously submitted ERC claim. According to the IRS, you can withdraw the claim only if all the following apply.

You made the claim on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X).
You filed the adjusted return only to claim the ERC and made no other adjustments.
You want to withdraw the entire amount of your ERC claim.
The IRS has not paid your claim. (If the IRS has paid your claim, you may still withdraw your claim if you have not cashed or deposited your refund check.)

What if you’re not eligible to withdraw your claim? According to the IRS, you might still be able to “reduce or eliminate” your ERC claim by filing an amended tax return if you do not meet the above criteria.

How to withdraw an ERC claim

The IRS has specific instructions for withdrawing ERC claims when businesses have not yet cashed their refund check:

If your payroll submitted the claim, the company may need to submit the withdrawal request for you.
If notified of an audit, you can send the withdrawal request to the assigned examiner or respond to the notice.
If you filed the claim yourself and are not under audit, you can fax withdrawal requests to the IRS using a computer or mobile device (applies only if you have not cashed, deposited, or received your refund check).

Note: If you received but have not cashed a refund check, you must mail your voided check with your withdrawal request.

How to repay your ERC claim

As stated, the IRS recently suspended the ERC Voluntary Disclosure Program, but if no changes are made to the program and if it reopens, all employers that already received their ERC credit would be eligible to repay their claims as long as the following conditions apply:

The business is not under criminal investigation and has not been notified that the IRS intends to commence a criminal investigation
The IRS has not received information from a third party alerting the IRS to the participant’s noncompliance
The IRS has not acquired information directly related to the noncompliance from an enforcement action.
The business is not under an employment tax examination by the IRS for any tax period(s) for which the taxpayer is applying for this Voluntary Disclosure Program.
The business has not previously received notice and demand for repayment of all or part of the claimed ERC.

Taxpayers can find detailed instructions for withdrawing claims on the IRS’ Withdraw an Employee Retention Credit Claim webpage. If you have concerns about the process or whether you should withdraw your claim, consult a trusted, professional tax professional or financial advisor.

In the meantime, the IRS urges taxpayers not to trust unsolicited correspondence from anyone urging them to claim an ERC credit and not to take out a loan in anticipation of receiving a refund for their claim. If you receive a tax scam email or otherwise suspect ERC fraud, you should report it to the IRS.

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Katelyn has more than 6 years of experience working in tax and finance. While she specialized in tax content while working at Kiplinger from 2023 to 2024, Katelyn has also written for digital publications on topics including insurance, retirement, and financial planning and had financial advice commissioned by national print publications. She believes knowledge is the key to success and enjoys providing content that educates and informs.