The IRS has established a new process that gives employers the ability to rescind what may have been inaccurate Employee Retention Credit (ERC) claims.

The move comes a month after the IRS announced a moratorium on processing these claims in the face of a spate of dubious claims for ERC credits promoted by so-called ERC mills. The fraudsters employ a variety of tactics to dupe business into filing claims for what the IRS calls “an incredibly complex credit" with "very specific eligibility requirements."

The IRS created the withdrawal option to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Claims that are withdrawn will be treated as if they were never filed, so the IRS will not impose penalties or interest.

Those who willfully filed a fraudulent claim, however, or those who assisted or conspired to file such a claim, will not be exempt from potential criminal investigation and prosecution by withdrawing the claim.

“The IRS believes many of the applications currently filed are likely ineligible, and tax professionals note anecdotally that they are seeing instances where 95 percent or more of claims coming in recent months are ineligible as promoters continue to aggressively push people to apply regardless of the rules,” it stated when it announced the moratorium

Since then, the IRS said that it has received approximately 3.6 million claims for the credit over the course of the program.

A week after the IRS announced its halt to processing new ERC claims for the rest of 2023, it issued another statement that encouraged businesses to work with qualified tax professionals to determine their eligibility for the credit.

The new withdrawal option allows certain employers that filed an ERC claim but have not yet received a refund to withdraw their submission and avoid future repayment, interest and penalties. Employers that submitted an ERC claim that is still being processed can withdraw their claim and avoid the possibility of getting a refund for which they are ineligible.

"The IRS is committed to helping small businesses and others caught up in this onslaught of Employee Retention Credit marketing," said IRS Commissioner Daniel Werfel. "The aggressive marketing of these schemes has harmed well-meaning businesses and organizations, and some are having second thoughts about their claims. We want to give these taxpayers a way out. The withdrawal option allows employers with pending claims to avoid future problems, and we encourage them to closely review the withdrawal option and the requirements. We continue to urge taxpayers to consult with a trusted tax professional rather than a marketing company about this complex tax credit."

Employers can use the new claim withdrawal process if all of the following conditions apply:

● They made the claim on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X);

● They filed the adjusted return only to claim the ERC, and they made no other adjustments;

● They want to withdraw the entire amount of their ERC claim; and

● The IRS has not paid their claim, or the IRS has paid the claim, but they haven't cashed or deposited the refund check.

To take advantage of the claim withdrawal procedure, taxpayers should follow special instructions. The IRS is also conducting a Nov. 2 webinar on the latest information on the moratorium and options for withdrawing or correcting previously filed ERC claims. In addition, the agency is offering a new question-and-answer checklist last month to help taxpayers understand if they're eligible for the credit, as well as warning signs of potential ERC scams.

The IRS said that it is working on guidance to help employers that were misled into claiming the ERC and have already received the payment, with more details forthcoming.