Quick Summary & Key Highlights
On December 21, 2023, the IRS announced the Voluntary Disclosure Program, its latest step to protect the integrity of ERC and safeguard the funds allocated for economic relief during the pandemic. By implementing this program, the IRS intends to give these taxpayers the opportunity to disclose ERC claims made in error before an ERC audit occurs to minimize repercussions. Below we will summarize the details of this program and what steps employers should take if they believe they qualify.
- Deadline to Apply: Eligible businesses have until March 22, 2024, to apply.
- Repayment Terms: Businesses who are accepted are only required to repay 80% of the ERC amount they received.
- Interest Exemption: Businesses are not required to repay any interest received on their ERC refund claims.
- No Requirement to Amend for Wage Expense: Businesses that are accepted into the Voluntary Disclosure Program are not required to amend their income tax returns to reduce their wage expense.
- Installment Agreements: Businesses facing difficulties in repaying the full 80% can seek an installment agreement.
Background – Employee Retention Credits
The Employee Retention Credit is a refundable tax credit available to certain eligible businesses and tax-exempt organizations which had employees that were affected during the COVID-19 pandemic. The credit is available to eligible employers that paid qualified wages to some or all employees after March 12, 2020, and before January 1, 2022. Subject to limitations, the credit aims to provide financial relief to qualifying businesses that:
- Were shut down by a government order due to the COVID-19 pandemic; or
- Experienced the required decline in gross receipts during eligibility periods during 2020 of the first three quarters of 2021; or
- Qualified as a recovery startup business for the third or fourth quarters of 2021.
Due to growing concerns of fraudulent filings and deceptive practices in calculating ERC, the IRS has taken several steps to ensure the funds that have been or will be issued under ERC have been properly dispersed to qualifying taxpayers. Since announcing a moratorium on processing new ERC claims in September 2023, the IRS has reviewed claims with more scrutiny and continues to require certain validating documentation be provided by applicants. It is crucial to ensure that all information provided in your claim is truthful and can be substantiated, as the IRS will be taking a closer look at the details of each claim. Businesses should be prepared for potential audits and inquiries into their ERC claims, even if they believe their claims are legitimate.
Understanding the Disclosure Program
The intent of the Voluntary Disclosure Program is to provide a settlement option for employers who financially benefited from these claims and now realize they should not have applied. The IRS recognizes that the influx of erroneous or excessive ERC claims is, in part, due to aggressive marketing around ERC and promotors who may be collecting a percentage fee. Many of the exploited taxpayers are eager to correct their error but remain concerned about their ability to pay back the portion of the credit that has been lost to the promoter who pushed them to apply. For this reason, if accepted into the program, the taxpayer will only be required to repay 80% of the credit they received.
Note: To qualify for this program, the employer must provide the IRS with names, addresses and telephone numbers of any advisors or tax preparers who advised or assisted them with their claim and details about the services provided.
Timing & Benefits of the Voluntary Disclosure Program
Eligible businesses must apply to the ERC Voluntary Disclosure Program by March 22, 2024, 11:59PM local time. By participating in the program, employers have the opportunity to resolve civil tax liabilities and avoid potential civil litigation, penalties & interest. Under the VDP, if the IRS paid interest on the employer’s ERC refund claim, the employer is not required to repay that interest.
Employers who are unable to repay the required 80% of the credit may be considered for an installment agreement on a case-by-case basis, pending submission and review of a Form 433-B. The IRS will not charge program participants interest or penalties on any credits they repay at the time of signing their closing agreement. However, if the employer is unable to repay the required 80% of the credit at the time of signing their closing agreement, then the employer will be required to pay penalties and interest in connection with entering into an installment agreement. In some cases, it may be advisable for the taxpayer to obtain a loan from a financial institution to avoid interest and penalties related to the installment agreement.
Who Can Apply?
Any employer who already received the ERC for a tax period but isn’t entitled to it can apply if the following are also true:
- The employer is not under criminal investigation and has not been notified that they are under criminal investigation.
- The employer is not under an IRS employment tax examination for the tax period for which they’re applying to the Voluntary Disclosure Program.
- The employer has not received an IRS notice and demand for repayment of part or all of the ERC.
- The IRS has not received information from a third party that the taxpayer is not in compliance or has not acquired information directly related to the noncompliance from an enforcement action.
What Businesses Need to Do
First, it is important for employers who have submitted ERC claims to know if they truly qualify. Employers who are unsure if they are eligible can review the ERC Eligibility Checklist via the IRS.gov website or consult a reputable third-party advisor to help determine if they were eligible upon application. Expert advisors can help you prepare and organize the necessary documentation, respond to IRS inquiries, and ensure compliance with IRS requirements.
To apply, the employer must file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, available on IRS.gov. This form must be submitted using the IRS Document Upload Tool. Form 15434 must be filled out under penalties of perjury and include:
- Taxpayer’s names, taxpayer identification number, current address, and contact information.
- Tax periods for ERC claims, forms used, and total ERC claimed (refundable or non-refundable)
- For tax periods ending in 2020, Form SS-10 “Consent to Extend the Time to Assess Employment Taxes” is required.
- Third party payers must attach Schedule R (Form 941) related to ERC claims.
- If a preparer or advisor assisted with the claim, their information and services description should be included.
Once the employer has applied to the program and submitted their Form 15434, an IRS employee will contact them to go over the application and answer any questions.
Note: Employers who outsource their payroll obligations must apply through the third-party. See Form 15434 instructions for additional details.
If the IRS approves the employer’s application, they will mail the employer a closing agreement. The employer must then repay 80% of the ERC they received, either online or by phone, using the Electronic Federal Tax Payment System (EFTPS). EFTPS is the Treasury Department system that most businesses already use to pay various federal tax obligations. Once payment is made, the employer must return the signed closing agreement to the IRS.
What To Do if Your ERC Claim is Still Pending
The IRS is continuing to accept and process requests to withdraw an employer’s full ERC claim under the special withdrawal process. This 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 has not yet been paid can withdraw their claim and avoid the possibility of getting a refund for which they’re ineligible. They can also withdraw their claim if they’ve received a check but have not yet deposited or cashed it. Claims that are withdrawn will be treated as if they were never filed.
The implementation of the ERC Voluntary Disclosure Program is a significant development that underscores the importance of accurate and legitimate claims within the ERC program. The disclosure program seeks to encourage taxpayers to accept settlement without significant repercussions to ensure that the ERC program’s relief reaches those who truly need it.
In an article issued regarding the VDP, the IRS encouraged taxpayers to take advantage of this program now if they believe they qualify to minimize risk. They advise that the 80% repayment figure will be more generous than later IRS action related to fraudulent claims. The enactment of this program accentuates the seriousness with which the IRS views the protection of government funds and the ERC program’s integrity.
We’re Here to Help
Navigating the ERC program and potential IRS audits can be complex and challenging. Bennett Thrasher has expertise in handing IRS Employee Retention Credit tax issues with the IRS. For more information, please contact Tim Watt, Tax Partner, or James Pickett, Director of Tax Controversy.