Service Hopes Taxpayers Will Take a Second Look at Paid Claims
The Internal Revenue Service (IRS) today announced the temporary reopening of the Voluntary Disclosure Program (VDP) for potentially erroneous Employee Retention Credit (ERC) claims.
Participation in the VDP allows businesses to repay improper ERC payments at a 15% discount while avoiding audits, penalties, and interest. The VDP, which was previously closed in March, received more than 2,600 applications worth more than $1 billion of credits. The IRS is hopeful this second iteration of the VDP will encourage more businesses “with improper claims to come in ahead of IRS compliance work.”
The new ERC VDP will run through Nov. 22, 2024. The IRS hopes businesses who previously received ERC payments will use the IRS-published warning signs to take a second look at their own claims and evaluate if they should have, in fact, received the payments. The IRS also urged businesses that received ERC payments to seek the advice of a trusted tax professional to determine if the VDP is the right program for them.
The 15% discount for repaying credits is “a slightly reduced rate from the first program’s 20% discount that ended in March,” the IRS said. While participation in the program may help taxpayers avoid potential future audits, penalties, and interest, it does not provide protection from investigation or prosecution for criminal conduct.
In addition to reopening the program, the IRS said it is also sending 30,000 new letters to taxpayers this Fall to attempt to “reverse or recapture” more than $1 billion in improper claims. If a taxpayer receives one of these letters, they will be ineligible to participate in the VDP, another incentive—the IRS hopes—to spur participation in the VDP.
While the IRS devoted most of today’s announcement to touting the VDP, it also reminded taxpayers that the ERC Claim Withdrawal Program is still available for pending ERC claims and continues to give businesses a way to “correct mistakes” in previous claims. To date, the withdrawal program has led to more than $677 million in claims being withdrawn.
ERC Background
The ERC, created under the CARES Act to assist businesses that continued to pay their employees during the COVID-19 pandemic, is a refundable tax credit that allows employers to offset their employment taxes against a percentage of qualified wages paid to employees. Eligible taxpayers can claim the ERC on an original or amended employment tax return for an eligible period between March 13, 2020, and December 31, 2021. To qualify for the ERC, a business must meet one of the following three criteria:
- Experienced a full or partial suspension of operations resulting from a government order issued due to the COVID-19 pandemic during 2020 or the first three quarters of 2021;
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021 as defined by the criteria set forth in the appropriate IRS guidance (Notice 2021-20 for 2020 and Notice 2021-23 for 2021);
- Qualified as a recovery startup business for the third or fourth quarters of 2021 as defined in Notice 2021-49.
Since October 2022, the IRS has been warning taxpayers to be wary of dubious ERC schemes. Last March, the IRS issued IR-2023-49, placing abusive ERC schemes at the top of its 2023 list of “Dirty Dozen” transactions. In September 2023, the IRS imposed a moratorium on processing ERC claims.
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