The IRS has increased its scrutiny of ERC refund claims and will be cracking down on ineligible and fraudulent ERC refund claims. The Department of Justice is pursuing criminal charges against those that have participated in this fraud.
The IRS announced on Oct. 19 that it is offering taxpayers having second thoughts about previously filed ERC claims an opportunity to withdraw their claims. The new program generally is available to taxpayers that filed an ERC claim but that haven’t received their refund or, if they have received their refund, they haven’t cashed the check. This announcement follows previous IRS announcements about its concern that taxpayers, particularly small businesses, were pressured or misled by aggressive promoters into filing claims for which they were ineligible.
The ERC was created as part of the Coronavirus Aid, Relief, and Economic Security Act and is an elective, refundable payroll tax credit designed for businesses that continued paying employees during the COVID-19 pandemic while their business operations were fully or partially suspended due to a government order, or that had a significant decline in gross receipts during certain eligibility periods (generally from March 13, 2020, through the third quarter of 2021). The IRS has received approximately 3.6 million claims for this credit since the program began. However, due to its concerns about aggressive promoters and that an increasing number of new claims might be ineligible, the IRS announced in September that it was placing a temporary moratorium through Dec. 31 on processing all new ERC claims. In addition, the IRS is subjecting ERC claims received prior to the moratorium to increased compliance scrutiny. As a result, the standard time for taxpayers waiting to receive a typical ERC refund has gone from 90 days to 180 days or longer.
Crowe observation
Taxpayers that have not yet received their ERC refund should not be surprised if they receive correspondence from the IRS asking questions about their claim or notifying them that the IRS is auditing their claim.
To be eligible for the ERC claim withdrawal process, all of the following must apply:
If a taxpayer is eligible for part, but not all, of the ERC amount claimed, withdrawing the claim and filing a new claim for the lower ERC amount might be an option depending on the taxpayer’s particular circumstances.
The IRS provided detailed instructions, including a sample Form 941-X, of how taxpayers can withdraw their claims based on different situations. Taxpayers that haven’t received a refund check and haven’t been notified that their claim is under audit can fax their withdrawal claim to the IRS. Taxpayers that received a refund check but haven’t cashed or deposited it can mail the withdrawal request and the uncashed refund check (voided according to the IRS guidance) to the IRS Cincinnati Refund Inquiry Unit. Taxpayers that haven’t received a refund check but have been notified that their claim is under audit can ask the agent how to submit the withdrawal request. If a taxpayer received an audit notice but an agent has not been assigned, the taxpayer can send the withdrawal request to the address on the audit notice.
After the IRS reviews the withdrawal request, it will notify the taxpayer about whether the request is accepted or rejected. The taxpayer’s ERC claim withdrawal is not effective unless it receives an IRS acceptance letter.
Claims that are successfully withdrawn will be treated as if they were never filed, and the IRS will not impose penalties or interest. However, the IRS cautions that taxpayers that willfully filed a fraudulent claim will not be able to avoid potential criminal investigation and prosecution by withdrawing their claim.
Taxpayers not eligible to use the withdrawal process may reduce or eliminate their ERC claim by filing an amended employment tax return.
The IRS also is working on guidance for a disclosure program anticipated to be released later in 2023 for taxpayers that are having second thoughts but that are ineligible for withdrawal because they already received and cashed their refund checks.
Taxpayers that file ERC claims also are required to file amended income tax returns for the corresponding tax period to reduce previously reported deductions for wages and, as a result, might have had to pay additional income tax for that tax period. Taxpayers withdrawing their ERC claim should consider filing another amended income tax return for that period to claim a refund of the additional amount of income tax paid. Generally, under Section 6511, taxpayers have three years from the date they filed their original return to claim a refund. Circumstances unique to each taxpayer can alter the period of time during which a refund can be claimed. Taxpayers should consult a reputable tax adviser to discuss their specific circumstances.
Taxpayers that receive ERC refund checks should confirm they are eligible for the ERC refund prior to cashing or depositing the check. Taxpayers that cashed ERC refund checks and that are unsure about whether they qualified for the amount received should consult a reputable tax adviser.
Taxpayers currently preparing ERC claims or considering filing new ERC claims should consult a reputable tax adviser to confirm that they are eligible for the amount of credit they are claiming. Additionally, taxpayers filing new ERC claims should understand the potential cash flow implications. Taxpayers filing amended employment tax returns to claim the ERC are required to amend corresponding income tax returns to reduce the wage deduction and might owe additional income tax. A significant lag could exist between when tax is paid and when the ERC refund is received.
