IRS announces ERC voluntary disclosure program

Tim Daum, Jackie McCumber, Adam Silva
| 2/1/2024
IRS announces ERC voluntary disclosure program
In summary
  • Recently announced voluntary disclosure program (VDP) offers certain taxpayers the ability to repay employee retention credit (ERC) claims at a discount and without penalty.
  • The deadline to apply to participate in the VDP is quickly approaching.
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The IRS announced that it has launched a long-anticipated VDP for businesses that received the ERC. The deadline for submitting a VDP application is March 22, 2024. The IRS also issued frequently asked questions to help taxpayers navigate this new program. This taxpayer-favorable program allows ERC claims to be repaid at a discounted rate without penalty.

The new program supplements prior IRS efforts to address questionable ERC claims, including a temporary moratorium on processing new ERC claims and a withdrawal program that allows certain taxpayers that previously filed but have not yet received an ERC refund or, if the refund was received, have not cashed it, to withdraw their claims. The ERC VDP provides eligible employers that already have received an ERC refund an opportunity to voluntarily come into compliance without having to repay the full amount received and without penalty.

VDP details

Applicants accepted into the program will be required to repay 80% of the credit received. Any interest the employer received on the ERC refund does not have to be repaid. The IRS will not impose civil penalties related to underpayment of employment tax attributable to the ERC covered by an accepted VDP application. The 80% repayment and interest forgiveness are being provided because many taxpayers were charged a percentage fee by promoters and, therefore, might not have received the full amount of the credit.

As part of the VDP application, employers must provide the name, address, and telephone number of any adviser that assisted them with their claim and details about the services the adviser provided. If accepted into the VDP, applicants also will be required to enter into a closing agreement with the IRS.

An employer can qualify for the VDP if all of the following are true:

  • The employer is not under criminal investigation and has not been notified that it is under criminal investigation.
  • The employer is not under an IRS employment tax examination for the tax period for which it is applying to the VDP.
  • 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.
  • The IRS has not acquired information directly related to the noncompliance from an enforcement action.

To apply, employers must file Form 15434, “Application for Employee Retention Credit Voluntary Disclosure Program,” through the IRS’ document upload tool. Once accepted, employers will have to repay 80% of the ERC it received in full. Employers that are not able to repay the amount owed in full can apply for an installment agreement, which requires submission of significant financial information to demonstrate the inability to pay and does not come with the same interest and penalty relief that is provided to taxpayers that repay the ERC in full. Interest on the unpaid amount continues to run during the installment agreement payment period, so the IRS is encouraging employers to borrow the funds to avoid this option.

If an employer outsourced its payroll obligations and had a third party file on its behalf using the third party’s employer identification number (EIN), the third party, not the employer, must file the Form 15434.

Income tax considerations

Taxpayers that file ERC claims are required to also file amended income tax returns for the corresponding tax period to reduce previously reported deductions for wages and, as a result, might have to pay additional income tax for that tax period. Taxpayers paying back ERC claims under the VDP that previously filed amended returns to reduce deductions for wages should consider whether to file additional amended income tax returns for the periods to which the repaid ERC relates. Generally, under IRC Section 6511, taxpayers have three years from the date they filed their original return to claim a refund. Circumstances unique to each taxpayer can alter that period to claim a refund.

Crowe observation

Focus on ineligible ERC claims continues to grow. Proposed legislation would cut off the period for employers to claim the ERC. The proposal also includes a provision to extend the time the IRS has to assess tax against ineligible employers that received ERC refunds.

Looking ahead

Taxpayers that claimed the ERC and have received their refund should confirm they are eligible for the ERC and the amount claimed. Taxpayers that are unsure should consult a reputable tax adviser to discuss their options, including whether the VDP is appropriate in their situation. Taxpayers that have filed ERC claims but have yet to receive their refund and that might be unsure about their eligibility should consult a reputable tax adviser about whether to withdraw their claims.

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Tim Daum
Principal, Washington National Tax
Jackie McCumber
Washington National Tax
Adam Silva
Adam Silva
Washington National Tax