The IRS’ ERC Withdrawal Process Presents Both Opportunities and Risks

On October 19, 2023, the Internal Revenue Service (IRS) announced a limited-time “withdrawal option” for businesses that improperly claimed the Employee Retention Credit (ERC). The ERC is a pandemic-era relief program that allows eligible businesses to claim refundable employment tax credits for the 2020 and 2021 tax years.

Technically, the ERC is still open. Eligible businesses can claim the ERC retroactively—although the IRS imposed a moratorium on new claims in September as it focuses its efforts on combating widespread fraud under the program. The IRS has stated that the moratorium will last through at least the end of 2023. The IRS has not yet announced an end date for the withdrawal option—though it has made clear that business owners who ignore their companies’ invalid ERC claims will leave themselves exposed to intensive scrutiny.

What Business Owners Need to Know About the ERC Withdrawal Process

The IRS’ ERC withdrawal process is intended as a sort of safe harbor for business owners who unknowingly filed invalid ERC claims. As the IRS explains, its goal in establishing the withdrawal option is “to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims.” Fraudulent ERC filing schemes proved to be a major issue during (and after) the COVID-19 pandemic and the IRS is now providing eligible businesses the opportunity to avoid penalties and interest that they would otherwise owe as a result of falling for these schemes.

But, while the IRS has stated that it will treat withdrawn ERC claims “as if they were never filed,” it has also stated:

“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.”

Thus, the ERC withdrawal process presents both opportunities and risks. While eligible business owners can use the withdrawal process to avoid liability for penalties and interest, filing for withdrawal does not provide immunity from an audit, investigation, or criminal prosecution. As a result, before filing for withdrawal, business owners must not only assess their eligibility, but they must also assess the very real risk that filing for withdrawal could trigger additional scrutiny from the IRS or IRS Criminal Investigation (IRS CI).

Intent is Not a Factor for Determining ERC Withdrawal Eligibility

A key aspect of the IRS’ ERC withdrawal process is that intent is not a factor for determining eligibility. While the withdrawal option is intended primarily for businesses that fell victim to ERC filing schemes, this is not one of the eligibility criteria. As outlined by the IRS, any business can withdraw its ERC claim if:

• It claimed the ERC through an adjusted employment return (IRS Form 941-X, 943-X, 944-X or CT-1X);
• It made no other adjustments through its adjusted employment return;
• It is seeking to withdraw the entire amount of its ERC claim; and,
• It has not received an ERC refund from the IRS (or if it has received a refund check, it has not cashed the check).

But, since withdrawing an ERC claim does not provide immunity from prosecution, business owners who file for withdrawal must be confident that doing so will not trigger an audit or investigation. If this is a risk, there are other options available—as discussed in detail below.

Evidence of Intentional ERC Fraud Can Trigger a Criminal Investigation and Prosecution

If an ERC withdrawal filing triggers IRS (or IRS CI) scrutiny and an ensuing audit or investigation uncovers evidence of intentional ERC fraud, this can present substantial risks. Along with liability for back taxes, interest, and civil penalties, allegations of intentional ERC fraud can also lead to an indictment on charges including (but not limited to):

• Tax evasion (26 U.S.C. Section 7201), which carries up to a $100,000 fine ($500,000 for corporations) and five years of federal imprisonment.
• Tax fraud (26 U.S.C. Section 7206), which carries up to a $100,000 fine ($500,000 for corporations) and three years of federal imprisonment.
• Mail fraud or wire fraud (18 U.S.C. Section 1341 or 1343), which carries up to a $250,000 fine ($500,000 for corporations) and up to 20 years of federal imprisonment.

There are many other potential criminal tax charges as well. As a result, informed decision-making is critical, and business owners who have concerns about their companies’ ERC claims should consult with an experienced tax lawyer regarding their next steps.

Alternatives for Business Owners Who Have Concerns About Facing ERC-Related Scrutiny

Let’s say you have concerns about facing allegations of intentional ERC fraud from the IRS. What are your options in this scenario?

While there are a number of possibilities, the best course of action in this scenario may be to submit a voluntary disclosure. Voluntary disclosure is an option for taxpayers who have “willfully failed to comply with tax or tax-related obligations.” While submitting a voluntary disclosure does not guarantee immunity from prosecution, “a voluntary disclosure may result in prosecution not being recommended.”

By working with experienced counsel to submit their voluntary disclosures, taxpayers who are at risk for criminal scrutiny can work out a favorable (and final) resolution with the federal government. Settlement is an option in most cases—as long as taxpayers don’t make mistakes that lead to prosecution. As a result, before you notify the IRS that your business filed an invalid ERC claim by filing for withdrawal, you should consult with an experienced tax lawyer who can help you decide how best to proceed.

Request a Confidential Initial Consultation at Brown Tax, P.C.

Our firm represents individual and corporate taxpayers in high-stakes federal tax matters. If you have concerns about facing ERC-related scrutiny from the IRS or IRS CI, we invite you to get in touch. To request a confidential consultation with a federal tax lawyer at Brown Tax, P.C. in Fort Worth, please call 888-870-0025 or tell us how we can reach you online today.