The employee retention credit, or “ERC,” was introduced in 2020 as a part of the CARES Act to encourage businesses to keep workers on the payroll in 2020 and 2021 during the COVID-19 pandemic. For eligible businesses, the ERC provides payroll tax credits for wages and health insurance paid to employees during those difficult years. The ERC program ended with the enactment of the Infrastructure Investment and Jobs Act in November 2021, but businesses can still claim ERC credits retroactively for a period of three years.
Since the time the ERC was introduced, the IRS has issued ad hoc guidance on the program, which has not been vetted by the public or the courts. In recent weeks, the IRS decided to issue a moratorium on ERC payments and put into place a limited amnesty program for certain participants to unwind what the IRS perceives to be abusive claims. The IRS’s changing parameters for a program Congress created to help struggling businesses has put many well-intentioned taxpayers in a difficult position of either being unable to obtain their credits or left wondering whether they should withdraw the claims altogether.
The ERC provided a valuable tool to businesses and employees. However, in a September 14 news release, IR-2023-169, the IRS announced an immediate moratorium on retroactive ERC claims. ERC claims filed after September 14, 2023, will not be processed before the end of the year, and claims filed before then will be under “enhanced scrutiny,” with the standard processing goal of 90 days being increased to 180 days. This moratorium comes in response to a flood of what the IRS believes to be ineligible claims resulting from aggressive marketing and promotion of the credits.
The Amnesty Program and Process
In the moratorium announcement, IRS officials stated that there would be an opportunity for taxpayers to withdraw ERC claims that have not yet been processed. In an October 19 news release, IR-2023-193, the IRS provided more details on the withdrawal process and provided links to new resources to assist employers and tax professionals through the process. These resources include an interactive eligibility checklist and answers to frequently asked questions.
The new withdrawal option allows employers who filed ERC claims that have not yet been processed to withdraw their claims, avoiding possible repayment, interest, and penalties. The October 19 news release provides the four requirements for employers who wish to withdraw their ERC claims through this new process:
- The employer made the claim on an amended employment tax return.
- The employer filed the amended return only to claim the ERC, and no other adjustments were made.
- The employer requests the withdrawal of the entire ERC claim.
- The employer has not yet received a refund from their ERC claim, or the employer has not cashed or deposited the check if they were issued a refund.
Employers withdrawing an ERC claim should be careful to follow the strict procedural requirements for withdrawals. These procedures differ depending on if the employer has received a refund, if a refund check has been cashed or deposited, or if the employer has been notified that their claim is under audit. After an employer submits their withdrawal request, the IRS will respond with a letter accepting or rejecting it.
Because IRS informal notices are the only source of guidance on this Congressional authorized program, it is difficult to discern whether the limitations imposed by the IRS are overly restrictive. Employers considering withdrawal of the ERC claims should consult with their tax advisors and determine whether withdrawal is right for them. Given the ambiguities associated with ERC claims and eligibility, the analysis of whether, when, and how to file a withdrawal of an ERC claim could involve a complex analysis.