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Ultimate Guide to IRS ERC Withdrawal Program

Everything Business Owners in Virginia Need to Know About the IRS' ERC Withdrawal Program

The Employee Retention Credit (ERC) was a COVID-19 pandemic relief program designed to help businesses that kept their employees on payroll during difficult times. And in many cases, it served its intended purpose. Many businesses immediately claimed the ERC for the 2020 and 2021 tax years, and the tax credits (and refunds) they received helped them weather the pandemic’s economic impacts.

But, since then, the ERC has transformed into something else entirely.

Fast-forward to 2023, and ERC claims are on the Internal Revenue Service’s (IRS) “Dirty Dozen” list. The IRS is targeting businesses that improperly claimed the ERC both during and after the pandemic. While it is primarily focusing on cases involving ERC promoter scams (with the stated goal of protecting business owners and taxpayers), many businesses and business owners have faced substantial penalties as a result of submitting fraudulent ERC claims.

IRS Announces ERC Claim Withdrawal Program in October 2023

On October 19, 2023, the IRS announced the launch of a withdrawal program for business owners who have concerns about the validity of their ERC claims. While the ERC withdrawal program is intended “[a]s part of a larger effort to protect small businesses and organizations from scams,” all business owners who have concerns are potentially eligible to file. The IRS did not announce an end date for the program, and currently, all business owners who meet the eligibility criteria can file to have their ERC claims withdrawn.

In this Ultimate Guide to the IRS ERC Withdrawal Program, we cover everything that business owners in Virginia need to know. If you are wondering whether to withdraw your business’s ERC claim, you can use our Ultimate Guide to make informed decisions. However, the information in this Ultimate Guide is not a substitute for legal advice, and before you make any decisions that could impact your legal risk, we encourage you to contact us for a confidential consultation.

Here is what business owners in Virginia need to know about the IRS' ERC withdrawal program:

When Should a Business Consider Withdrawing Its ERC Claim?

The first thing business owners in Virginia need to know is whether they need to consider withdrawing their ERC claims. Those who don’t can simply keep their credits (or wait to receive their refund checks) and continue business as usual. But, those who do need to consider withdrawal may need to act quickly to avoid unnecessary scrutiny from the IRS.

The ERC was available for the 2020 and 2021 tax years. However, the eligibility criteria changed from one year to the next. While even the IRS acknowledges that the ERC is “a complex credit with precise requirements,” the IRS has also made clear that the credit’s complexity is not an excuse for submitting an invalid claim.

Deciding whether to file an ERC withdrawal requires a clear understanding of two key factors: (i) whether your business qualified for the ERC for the year (or years) that it filed, and (ii) whether your business calculated the ERC correctly on each filing. For the 2020 tax year, the ERC eligibility criteria were:

  • The business experienced a full or partial suspension of operations due to a government order related to the COVID-19 pandemic during any quarter (beginning March 13, 2020) or,
  • The business experienced a significant decline in gross receipts during any quarter (also beginning March 13, 2020).

Under the CARES Act, a significant decline in gross receipts is defined as a decline resulting in the business’s gross receipts being less than 50 percent of its gross receipts for the same quarter in 2019. A significant decline ended when the business achieved greater than 80 percent of its gross receipts for the same quarter in 2019.

For the 2021 tax year, the ERC eligibility criteria were more complicated. Initially, when the Relief Act of 2021 renewed the ERC through June 30, 2021, businesses could claim the credit if they experienced a decline in gross receipts (as opposed to the “significant” decline required under the CARES Act for 2020). This was defined as a decline resulting in the business’s gross receipts being less than 80 percent of its gross receipts from the same quarter in 2019. However, businesses also had the option to look at the prior calendar quarter and compare it to the same quarter in 2019, and businesses that didn’t exist in 2019 could compare their 2021 quarterly gross receipts to their gross receipts from 2020.

The American Rescue Plan Act (ARPA) extended the ERC through the end of 2021, and it also made the credit available to “recovery startup businesses.” However, the Infrastructure Investment and Jobs Act subsequently amended ARPA to provide that the ERC was only available to recovery startup businesses for the fourth quarter of 2021. Under ARPA, a “recovery startup business” was defined as a company that:

  • Began carrying on any trade or business after February 15, 2020;
  • Had average annual gross receipts under $1 million “for the 3-taxable-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined;” and,
  • Did not otherwise meet the eligibility criteria to claim the ERC.

In addition to determining their eligibility for the ERC, businesses that claimed the ERC also needed to ensure that they calculated their credits correctly. Along with establishing formulas for calculating the credit, the CARES Act, Relief Act and ARPA also established maximum credit amounts for eligible businesses. The formulas and maximums changed from year to year, further complicating the process of correctly claiming the ERC:

  • For 2020, businesses could claim 50 percent of their “qualified wages” (up to $10,000 per employee for the year), with a maximum credit of $5,000 per employee.
  • For 2021, businesses could initially claim up to 70 percent of their “qualified wages” (up to $10,000 per employee per calendar quarter), with a maximum credit of $7,000 per employee. However, ARPA imposed additional limitations for the third and fourth quarters.

It is not hard to see why many business owners were confused. It is also not hard to see why many business owners turned to third parties to help them claim the ERC. Unfortunately, in many cases, business owners’ trust in these third-party service providers proved to be misplaced—and, as a result, many business owners who tried to do the right thing are now at risk of facing scrutiny from the IRS.

Which Businesses Are Eligible to File ERC Claim Withdrawals?

Not all businesses that improperly claimed the ERC in 2020 or 2021 (or both) are eligible to file ERC claim withdrawals. When the IRS announced the ERC withdrawal program in October 2023, it placed specific limits on filing eligibility. Under the IRS' rules, businesses can only file to withdraw their ERC claims if they meet all four of the following criteria:

  • Adjusted Employment Return – To take advantage of the IRS' ERC withdrawal program, a business must have claimed the ERC using an adjusted employment return (IRS Form 941-X, 943-X, 944-X or CT-1X).
  • No Other Adjustments – When claiming the ERC using an adjusted employment return, the business must not have made any other adjustments.
  • Entire Amount – Businesses can only take advantage of the ERC withdrawal program if they want to withdraw the entire amount of their ERC claim.
  • Claim Not Paid – Businesses can only take advantage of the ERC withdrawal program if the IRS has not paid their claim (either the business has not received a refund check or it has not deposited or cashed its refund check).

If a business does not meet all four of these requirements, then it cannot file for ERC withdrawal. Our Virginia tax attorney discusses the options available to non-qualifying businesses later in this Ultimate Guide.

When Should You File an ERC Claim Withdrawal?

For businesses that are eligible to withdraw their ERC claims (and need to withdraw due to improperly claiming or calculating the credit), a key question involves timing: When should you file an ERC claim withdrawal? Should you file immediately? Or should you wait and see if the IRS raises concerns about your business’s credit for 2020 or 2021?

The short answer is that you should file immediately. There is no reason to wait, and waiting can potentially have adverse consequences. The IRS is actively targeting ERC fraud, and it is devoting substantial resources to uncover both invalid and falsely inflated claims. Once the IRS initiates an audit or investigation, voluntary withdrawal is no longer possible—and businesses that have underpaid their employment tax obligations can face liability for back taxes, interest and penalties.

With that said, business owners should not rush to withdraw their ERC claims just because the IRS' withdrawal program is open. Business owners should first confirm whether withdrawal is necessary, and then they should confirm whether they are eligible to take advantage of the IRS' withdrawal program. Withdrawing unnecessarily could result in significant unnecessary business expenses while attempting to withdraw when a business is ineligible to do so could invite scrutiny from the IRS.

How Do You File an ERC Claim Withdrawal?

Let’s say your business improperly claimed or calculated the Employee Retention Credit, and let’s say that your business is eligible under the IRS' ERC withdrawal program. How do you file an ERC claim withdrawal?

The IRS provides guidance on its website. Businesses must take different steps depending on their present circumstances. The IRS outlines three primary scenarios:

  • The business hasn’t received a refund and hasn’t received an audit notice
  • The business hasn’t received a refund and has received an audit notice
  • The business has received a refund check but hasn’t cashed or deposited it

1. The Business Hasn’t Received a Refund and Hasn’t Received an Audit Notice

For businesses that haven’t received a refund and that are not presently facing an audit, the IRS provides the following instructions:

  • Make a copy of the adjusted tax return for the claim being withdrawn;
  • Write “Withdrawn” in the left margin of the first page;
  • Have an authorized person sign, date, and write their name and title in the right margin of the first page; and,
  • Fax the document to the IRS' ERC claim withdrawal fax line (855-738-7609) or mail it to the address listed in the instructions for the adjusted return.

If the business is seeking to withdraw ERC claims for the 2020 and 2021 tax years, then it must complete these steps with a copy of its adjusted tax return for each year.

2. The Business Hasn’t Received a Refund and Has Received an Audit Notice

For businesses that haven’t received a refund and are currently facing IRS audits, the IRS advises against submitting a withdrawal request via fax or mail. Instead, it advises that businesses should either (i) respond to their audit notice with their withdrawal request if they have not yet been assigned an examiner or (ii) if they have been assigned an examiner, communicate with their examiner regarding their next steps.

However, facing an IRS audit is a high-risk scenario, and acknowledging that your business improperly claimed the ERC when it is already facing scrutiny can potentially increase the risks involved. As a result, in this scenario, we recommend consulting with a tax attorney in Virginia before deciding how to deal with your business’s pending ERC claim (or claims).

3. The Business Has Received a Refund Check But Hasn’t Cashed or Deposited It

For businesses that have received a refund check but have not yet cashed or deposited it, the IRS provides yet another set of instructions. In this scenario, the IRS instructs that businesses should not fax in their withdrawal requests. Instead, in addition to taking the steps listed above, businesses should write “Void” in the endorsement section of the check and “ERC Withdrawal” in the notes section, as well as “briefly explain[ing] the reason for returning the refund check.”

Next, the IRS advises making copies of the signed adjusted tax return and voided check (but “[d]on’t staple, bent or paper clip the voided check”) and then mailing them to the following address:

Cincinnati Refund Inquiry Unit

P.O. Box 145500 Mail Stop 536G

Cincinnati, OH 45250

Regardless of how you submit your ERC withdrawal request, it is a good idea to make sure you receive some sort of delivery confirmation. This way, if there is ever a question as to whether your business timely submitted a withdrawal request, you will have proof that it did. However, as we discuss in the next section of this Ultimate Guide, there are other ways you will find out if the IRS has received your ERC withdrawal request as well.

Are There Risks Involved with Withdrawing an ERC Claim?

When you submit an ERC withdrawal request to the IRS, it is just that—a request. Filing a withdrawal request does not immediately protect you, and it may not protect you at all. As the IRS explains, after you submit your request by fax or mail:

“The IRS will send you a letter telling you whether your withdrawal request was accepted or rejected. Your approved request is not effective until you have your acceptance letter from the IRS. . . . If your withdrawal is accepted, you may need to amend your income tax return. . . . If you need help, seek out a trusted tax professional.”

Crucially, even if the IRS accepts your business’s ERC withdrawal request, this does not mean that your business (or you personally) is safe from further scrutiny. If your business has underreported or underpaid its federal tax liability, filing an ERC withdrawal request does not provide immunity. Additionally, if IRS agents have reason to suspect intentional fraud, they may still choose to pursue criminal charges despite a business owner’s withdrawal request. The IRS made this clear when it announced the ERC withdrawal program in October 2023, stating:

“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.”

As a result, filing an ERC claim withdrawal can be risky, and, in some cases, business owners may need to consider other alternatives even if their businesses are eligible under the ERC withdrawal program. We cover these alternatives in the “What if Your ERC Claim Isn’t Eligible for Withdrawal?” section of this Ultimate Guide.

What Are the Risks if You Don’t Withdraw an Invalid ERC Claim?

While filing an ERC claim withdrawal is not risk-free, the risks of failing to withdraw an invalid ERC claim can be even greater. While the IRS' ERC withdrawal program provides an opportunity for businesses to withdraw invalid claims, it also establishes an expectation. The IRS has heavily publicized the withdrawal program in an effort to let all ERC filers know that it exists.

As a result, if an eligible business doesn’t file a withdrawal request (or pursue one of the alternatives we discuss below), this may raise red flags at the agency. The IRS may consider a business owner’s decision not to withdraw an invalid ERC claim as evidence of intent to engage in tax fraud. While inadvertent tax mistakes can trigger civil liability, allegations of intentional tax fraud can expose businesses and their owners to criminal prosecution.

Under the Internal Revenue Code, tax fraud allegations can lead to multiple criminal charges. For example, businesses (and business owners) accused of intentionally filing invalid ERC claims may face charges including (but not limited to):

  • 26 U.S.C. Section 7201 – Willfully attempting to evade or defeat any federal tax carries up to a $100,000 fine for individuals ($500,000 for businesses) and up to five years of federal imprisonment.
  • 26 U.S.C. Section 7206 – Willfully signing or filing a false tax return carries up to a $100,000 fine for individuals ($500,000 for businesses) and up to three years of federal imprisonment.
  • 26 U.S.C. Section 7207 – Submitting any other false or fraudulent document to the IRS carries up to a $10,000 fine for individuals ($50,000 for businesses) and up to a year of federal imprisonment.

In many tax fraud cases, federal prosecutors will pursue other criminal charges as well. These include charges for mail fraud, wire fraud and money laundering, among others. When business owners work with third-party service providers (or other parties) to file fraudulent returns, they can face federal conspiracy charges as well. The penalties for these federal crimes can be far more severe than those imposed under the Internal Revenue Code—including six-figure fines and decades of federal imprisonment in some cases.

What if Your ERC Claim Isn’t Eligible for Withdrawal?

So far, we have covered all of the key aspects of the IRS' ERC withdrawal program, and we have also discussed the consequences of both filing and not filing a request for withdrawal. But what if your business isn’t eligible to take advantage of the IRS' ERC withdrawal program?

Amending a Business’ Adjusted Tax Return to Reduce or Remove an ERC Claim

The IRS advises that ineligible businesses “can reduce or eliminate their ERC claim by filing an amended return.” In its Frequently Asked Questions About the Employee Retention Credit, the IRS covers two potential scenarios:

1. Amending a Business’ Tax Returns to Reduce the Amount of Its ERC Claim

For businesses that need to reduce the amount of their ERC claim but not withdraw it entirely, the IRS advises preparing a new adjusted tax return (IRS Form 941-X, Form 943-X, Form 944-X or Form CT-1X) with the corrected ERC amount. Businesses should mail their new adjusted returns to the address stated in the form’s instructions.

2. Amending a Business’ Tax Returns to Remove Its ERC Claim

To remove an ERC claim that isn’t eligible for withdrawal, the IRS advises taking the same steps as those for reducing the amount of an ERC claim and simply stating the ERC claim amount as zero. In this scenario, business owners may need to ensure that the IRS is not in the process of processing or reviewing their previously filed adjusted returns.

Submitting a Voluntary Disclosure to IRS Criminal Investigation (IRS CI)

Similar to filing an ERC withdrawal request, filing an amended return does not insulate businesses or their owners from IRS scrutiny. In fact, filing an amended return to reduce or remove an ERC claim could trigger an audit or investigation in some cases.

When submitting an ERC withdrawal request or an amended return has the potential to trigger IRS scrutiny and possible allegations of intentional tax fraud, business owners in Virginia may need to consider a voluntary disclosure. IRS Criminal Investigation’s (IRS CI) Voluntary Disclosure Practice provides an opportunity to resolve willful tax law violations without facing a criminal tax fraud investigation.

However, submitting a voluntary disclosure also presents risks, and it isn’t an option in all circumstances. As IRS CI explains, “If you have willfully failed to comply with tax or tax-related obligations, submitting a voluntary disclosure may be a means to resolve your non-compliance and limit exposure to criminal prosecution.” But, as IRS CI goes on to explain, “A voluntary disclosure will not automatically guarantee immunity from prosecution . . . [but] may result in prosecution not being recommended.” As a result, submitting a voluntary disclosure is not a decision to be made lightly, and business owners who think this may be their best option should consult with a tax attorney promptly.

Just like filing an ERC withdrawal request, there are strict requirements for submitting a voluntary disclosure to IRS CI. If a business (or business owner) fails to follow these requirements, the benefits of voluntary disclosure may not be available. Additionally, just as following the standard withdrawal program procedures is not an option for businesses that are under audit, businesses that are already under scrutiny are no longer eligible to make a voluntary disclosure.

If you have concerns about your business’s ERC claim (or claims), deciding what to do isn’t necessarily a straightforward process. Even if your business is eligible under the IRS' ERC withdrawal program, this doesn’t necessarily mean that filing for withdrawal is the best option. Similarly, if your business is not eligible for withdrawal, you will need to choose carefully among the other options that are available. In any case, informed decision-making is critical, and it is important to seek legal advice from a knowledgeable Virginia tax attorney before acknowledging filing errors or misjudgments to the IRS through any means.

Are Other Businesses Withdrawing Their ERC Claims?

If you are thinking about withdrawing your business’s ERC claim, you might be wondering if other business owners are as well. Will you be one of the few who informs the IRS that you made a mistake if you file, or will you be missing out on an opportunity for your business if you don’t?

The IRS has received approximately 3.6 million Employee Retention Claims claims since the program’s enactment under the CARES Act. While it hasn’t yet stated what percentage of these claims appear to be fraudulent, it is clear that ERC fraud is a significant concern for the IRS. As a result, we expect that numerous businesses will file to withdraw their ERC claims—with the understanding that waiting to see if the IRS initiates an audit isn’t worth it.

What if the IRS is Already Auditing or Investigating Your Business?

Withdrawing an invalid or improperly inflated ERC claim provides an opportunity to reduce the risk of facing IRS scrutiny. But what if you are facing scrutiny already? What if the IRS is already auditing or investigating your business?

As discussed above, businesses that are under audit should not follow the standard withdrawal procedures under the IRS' ERC withdrawal program. Instead, the IRS recommends that businesses under audit either respond to their audit letter or communicate with their examiner if they wish to withdraw their ERC claims.

But, as also discussed above, this option is not without risks. When facing an IRS audit, informed decision-making is critical. While discussing the possibility of withdrawal with an examiner may be the best option in some circumstances, in others, addressing an invalid or improperly inflated ERC claim may need to be part of a broader audit defense strategy.

The same is true when facing an IRS CI investigation. Criminal tax fraud investigations present substantial risks—including substantial fines and prison time. IRS CI has already worked with the U.S. Department of Justice (DOJ) to pursue charges for ERC fraud in several cases. Uncovering and prosecuting intentional ERC fraud is a top federal law enforcement priority, and business owners who are facing allegations of willfully submitting fraudulent ERC claims must be prepared to defend themselves by all means available.

It is also important to keep in mind that IRS audits can—and frequently do—lead to IRS CI investigations. If an examiner finds evidence that suggests that a business owner was complicit in filing a fraudulent ERC claim, this may result in a referral to IRS CI. As a result, all IRS inquiries require prompt attention and a proactive defense strategy that takes into account the totality of the facts and circumstances at hand.

Is It Too Late for Businesses to Claim the ERC?

While millions of businesses have claimed the ERC—some rightly and some wrongly—many eligible businesses still haven’t filed. While it isn’t too late to file, the IRS has placed a moratorium on new ERC claims through at least December 31, 2023. In doing so, the IRS noted that it was “increasingly shifting its focus to reviewing [pending ERC] claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims.”

Amended claims are not subject to the moratorium. Thus, if businesses need to amend their returns to reduce the amount of their ERC claims, they are still able to do so even with the moratorium in place. However, the IRS notes that “[w]ith the stricter compliance reviews in place during this period, existing ERC claims will go from a standard processing goal of 90 days to 180 days – and much longer if the claim faces further review or audit.” As a result, business owners who file amended adjusted tax returns should not rely on receiving a refund any time soon.

Answers to FAQs About the IRS' ERC Withdrawal Program

If I was scammed, do I still need to withdraw my business’ ERC claim?

Yes, even if you are the victim of an ERC filing scam, you can still face liability for back taxes, interest and penalties if your business improperly claimed the ERC. This type of scenario is exactly what the IRS' ERC withdrawal program is intended to address. To avoid any unnecessary consequences, you should consult with a Virginia tax attorney about filing for withdrawal as soon as possible.

How do I know if the IRS has accepted my business’ ERC claim withdrawal?

The IRS should notify you of its decision to accept or reject your business’ ERC claim withdrawal by mail. However, as of yet, it has not published an anticipated processing time on its website. Note that even if the IRS accepts your withdrawal request, you may still need to amend your business’ tax returns in order to comply with the Internal Revenue Code.

What does it mean if the IRS doesn’t accept my business’ ERC claim withdrawal?

If the IRS notifies you that your business’s ERC claim withdrawal is not accepted, you should speak with a tax attorney promptly. In this scenario, you may be at risk for an audit or investigation—and you may need to present an effective defense to avoid unnecessary consequences.

I don’t know if I need to file an ERC claim withdrawal. What should I do?

If you are unsure whether you need to file an ERC claim withdrawal request, you are not alone. A tax attorney can help, and you should seek advice promptly.

Should I hire a Virginia tax attorney to assist with filing under the IRS' ERC withdrawal program?

While filing an ERC withdrawal is itself a relatively straightforward process, there are several reasons to consult with a tax attorney before you file. Not all businesses are eligible, and even for those that are, filing for withdrawal isn’t necessarily the best (or safest) option available. An experienced Virginia tax attorney can help you make informed decisions about resolving any issues related to your business’s ERC claim (or claims).

Contact Thorn Law Group to Discuss Your Business’ ERC Claim in Confidence

Located in Northern Virginia at 1934 Old Gallows Road, Suite 350, Tysons Corner, VA 22182, Managing Partner and Virginia Tax Attorney Kevin E. Thorn represents businesses and business owners statewide in federal tax matters. If you need to know more about the IRS' ERC withdrawal program or the risks of facing accusations of ERC fraud, we invite you to call Thorn Law Group at 703-752-3752 or contact us online to arrange a confidential initial consultation.


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