Avoiding prosecution for abusive ERC claims

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The IRS has announced a program that allows medical practice owners to back away from abusive Employee Retention Credit or ERC claims that may subject them to penalties ranging from fines to criminal prosecution.

We have shared many warnings about the questionable tax planning targeting physicians at this time every year including many legitimate strategies like conservation easements, captive insurance companies that are executed in an abusive and potentially criminal way. Unfortunately, this abuse has extended to the use of the Employee Retention Credit (ERC) I previously warned readers about last year. The ERC programs allowed employers who retained employees despite verifiable covid-related downturns in revenue during specific quarters of 2020 and 2021 to get a refund of the employment taxes they paid, up to a maximum of about $26K per employee.

The marketing of the ERC credit program how ever is often light on details about the very technical and specific financial qualifications employers must meet to make the claim and primarily pushes the idea that, “You’re going to get $26,000 per employee you employed during Covid, and we work on a contingency fee!”. This had led to what are potentially tens of thousands of abusive claims being filed and the I.R.S. is taking action including additional scrutiny of every ERC claim, the investigation of abusive filers and the promoters that advised them, pausing the processing of claims and providing detailed instructions on withdrawing a pending ERC claim.

The IRS asks, are you really sure you want to make that claim?

This pause gives rise for those who may have poorly advised about their qualification for an ERC refund and who have not yet received or cashed their refund check, to withdraw their claim and file amended tax paperwork. As always, my first stop for information on any tax related issue is the I.R.S itself, which often provides detailed, plain-English guidelines and explanations complete with illustrations. Here’s what they say about how to withdraw an Employee Retention Credit or ERC claim.

Who can request to withdraw an ERC claim

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

• They made the claim on an adjusted employment tax 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.
• The IRS has not paid their claim, or the IRS has paid the claim, but they haven't cashed or deposited the refund check.

Businesses that have willfully filed fraudulent claims, assisted in such conduct or conspired to do so should be aware, however, that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.

Employers that can't use this process may still be able to file another adjusted return if they need to reduce the amount of their ERC claim or make other changes to their adjusted return.

How to request an ERC claim withdrawal

You will follow different steps depending on your specific situation. The I.R.S. provides specific instructions for each of the following scenarios.

• You haven’t received a refund and haven’t been notified your claim is under audit
• You haven’t received a refund and you’ve been notified your claim is under audit
• You received a refund check but haven’t cashed or deposited it

If you use a professional payroll company and they filed your ERC claim for you, you should consult with them if you want to withdraw your ERC claim. Depending on how the company filed your claim – individually or batched with others – you may need to have them submit your withdrawal request.

Already cashed that check? Hold tight and have that money ready to send back.

The IRS is also working on guidance to help employers that were misled into claiming the ERC and have already received the payment. More details will be available this fall and I’ll keep you posted when they are released.

Attorney Ike Devji has 20 years of legal experience focused exclusively on asset protection, risk management and wealth preservation. He helps protect a national client base with more than $6 billion in personal assets, including several thousand physicians. He is a contributing author to multiple books for physicians, a Physicians Practice contributor for over a decade and a frequent national CME presenter. Learn more at www.ProAssetProtection.com.