To adjust an ERC credit received in a prior year, you would have to file amended payroll and income tax returns. In your case, having a S-Corporation, you would need to file amended forms 941, 1120-S and 1040.
You would use the K-1 from your amended 1120-S to amend your personal return on form 1040-X, which would most likely include a corrected schedule E.
There is no way to avoid the imposition of a penalty. Interest is always charged on underpayments under the theory the taxpayer had access to the funds and the IRS did not. If you are successful in reducing or eliminating penalties, that would also reduce the interest as interest is charged on tax and penalties. I would suggest waiting to see if penalties are assessed and, if they are, send a letter explaining the circumstances that led to the incorrect credit claim and requesting an abatement of the penalty. The IRS usually seeks to determine if there was “reasonable cause” for the error.
Here is a link to an IRS frequently asked questions about the Employee Retention Credit that will provide some additional information. Please note that, unfortunately, the ERC voluntary disclosure program (which allowed for a reduced payback and no penalties) closed on March 22, 2024.
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