On December 21, 2023, the IRS announced a much-anticipated Voluntary Disclosure Program (“the Program”) that allows businesses to repay funds received as a result of filing erroneous Employment Retention Credit (ERC) claims.
Program participants are required to pay back 80 percent of improper ERC refunds and will avoid penalties and interest. This unusual reduction recognizes that many employers fell victim to third-party promoters who aggressively marketed dubious ERC schemes and charged an up-front percentage fee, so the employer never received the full ERC amount. IRS Commissioner Danny Werfel explained that the Program benefits the “many employers eager to correct their error but who remain concerned about their ability to pay back the portion of the credit that has been lost to the promoter that brought them into this mess.”
Any employer that claimed the ERC and received a refund, or a credit, is eligible to participate in the Program so long as they meet four requirements:
- They are not under criminal investigation and have been notified that the IRS intends to commence a criminal investigation;
- The IRS has not received information from a third party about their noncompliance, nor acquired information directly related to the noncompliance from an enforcement action;
- They are not under an employment tax examination by the IRS for any tax period(s) for which they are applying for the Program; and
- They have not previously received notice and demand for repayment of all or part of the claimed ERC.
Program participants will not be charged underpayment interest and will avoid civil penalties for underpayment of employment tax attributable to the ERC. Participants who are unable to pay the full 80 percent at the time of a closing agreement under the Program may be eligible for an installment agreement.
Eligible employers must apply for the Program by March 22, 2024, by electronically filing Form 15434, Application for Employee Retention Credit Voluntary Disclosure. Employers who outsource their payroll obligations to a third-party payer, such as a professional employer organization, are eligible for the Program, but the third party must submit the application on the participant’s behalf.
The Program follows the IRS’s announcement in November of procedures for withdrawing pending, unpaid ERC claims. Employers with pending ERC claims who have reconsidered the validity of their claim may still use the withdrawal procedures.
The IRS also expects the Program to assist its ongoing aggressive ERC enforcement efforts because a participant must provide the name, address, and telephone number of any tax return preparer or advisor who assisted with their ERC claim, along with a description of the services provided. The IRS will use the information obtained from the Program to build civil or criminal cases against ERC promoters.
As an incentive for employers to enter the Program, the IRS also announced today that it is sending up to 20,000 letters to employers identified as having received improper refunds, with proposed tax adjustments to recapture the erroneously claimed ERC.
While the IRS’s announcement of the Program does not explicitly make this clear, it is expected that those who participate in the Program and abide by its requirements will not face further IRS action in connection with their ERC claims.
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 employers 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 employers 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.
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