Taxpayers Have Short Window to Take Advantage of ERC Voluntary Disclosure Program

Note: On August 15, 2024, the IRS announced it was reopening the Voluntary Disclosure Program. Details can be found here.

The IRS unveiled the details for a Voluntary Disclosure Program for employers who received erroneous Employee Retention Credit (ERC) refunds for tax years 2020 and 2021. Under the program, taxpayers will only be required to repay 80% of improperly received ERC payments or credits. Businesses, tax-exempt organizations, and government entities who wish to take advantage of the program must apply by March 22, 2024. 

The Voluntary Disclosure Program is the most recent development in the agency’s ongoing enforcement efforts surrounding the ERC. Previously, the IRS announced a moratorium on new ERC claims processing as well as a voluntary withdrawal program for pending ERC claims. The IRS has also sent over 20,000 letters disallowing ERC claims and announced more disallowance letters will be sent in the coming months.

Voluntary Disclosure Program Requirements

The ERC Voluntary Disclosure Program (“ERC-VDP”) is for employers who claimed the ERC and have received a refund or credit but are ineligible and need to repay it. To be eligible for the program, taxpayers must:

• not be under criminal investigation or have been notified the IRS intends to commence a criminal investigation,
• not be under an IRS employment tax examination for the same tax period for which they are applying to the voluntary settlement program,
• not have already received a notice and demand for repayment of part or all the ERC claimed, and
• not have already been reported to the IRS for noncompliance by a third party.

ERC Repayment Terms

Applicants will be required to repay 80% of improperly received ERC amounts. They may retain 20% of the ERC payments and will not be required to repay any interest they received. Taxpayers will not be liable for underpayment penalties for employment tax, provided they remit the full 80% repayment before a closing agreement is executed with the IRS. Additionally, they will not be required to repay any underpayment interest if the full 80% is timely remitted. Taxpayers will not be subject to an employment tax audit for ERC claims resolved within the terms of the Voluntary Disclosure Program.

Taxpayers who have submitted an ERC claim but do not qualify because they have not yet received a refund or credit should instead look to the previously announced voluntary withdrawal program. Under either program, applicants must not be eligible for or entitled to the ERC for the tax periods at issue. 

How to Apply for the Program

Taxpayers apply for the program using Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program. Applications must be received by March 22, 2024. The IRS has indicated that waiting will not result in a better offer in the future. The form must be submitted electronically, along with any required documentations or attachments. 

The form must provide information on the preparer or advisor who assisted with the ERC claim, as well as a description of the services the preparer or advisor provided. This is clearly aimed at identifying promoters who encouraged ineligible taxpayers to claim the credit in order to charge large contingency fees.

As the statute of limitations for 2020 claims expires on April 15, 2024, applicants must also agree to extend the time to assess 2020 employment taxes by an additional year with Form SS-10, Consent to Extend the Time to Assess Employment Taxes. 

ERC Closing Agreements

The IRS will prepare and send closing agreements to eligible taxpayers once the application is reviewed and approved. This closing agreement must be signed and returned to the IRS within ten days of the date it was mailed by the IRS. Applicants who show good cause may be granted an extension of time if they request it during the ten-day period. 

Applicants must remit the full payment by the date they execute the closing agreement. If they are unable to do so, they may request an installment agreement with their ERC-VDP submission. If an installment agreement is entered into, interest and penalties will apply from the agreement date.

Depending on the particular facts and circumstances, civil penalties may include failure to file and pay under IRC Sec. 6651, failure to deposit penalties under IRC Sec. 6655, the 20% accuracy related penalties under IRC Sec. 6662, and trust fund recovery penalties under IRC Sec. 6672 equal to the total amount of tax at issue. Higher penalties may be applicable in situations of fraud. 

Income Tax Implications 

Another benefit of the Voluntary Disclosure Program is that a reduction to wage expenses on income tax returns is not required, as the settlement eliminates the taxpayer’s entitlement to the claimed ERC. Taxpayers who have not already filed amended returns reducing wage expenses by ERC amounts will not have to take any action. For those taxpayers who already filed amended returns or administrative adjustment requests to reduce wage expenses by the applicable ERC amounts, subsequent amendments may be required to reclaim the previously reduced wage expense. The 20% of ERC payments that taxpayers are allowed to retain, and any interest received, will still be not includible in taxable income.

Further Enforcement

The IRS has repeatedly warned taxpayers to be wary of ERC promoters. The Voluntary Disclosure Program is the agency’s latest initiative to encourage taxpayers to review whether they qualify for ERC claims and participate in either the Voluntary Withdrawal or Voluntary Disclosure Programs if they now believe they are ineligible for the credit. Additionally, the IRS is sending out another 20,000 letters to taxpayers with proposed tax adjustments to recapture erroneously claimed credits for tax year 2020. The IRS advised that more letters are planned, including tax adjustment letters for tax year 2021.

Taxpayers who wish to take advantage of the Voluntary Disclosure Program by the due date of March 22, 2024, should work with a trusted tax advisor to determine their eligibility and protect themselves from potential penalties and interest.