As we previously have discussed, the IRS has for months been working to combat dubious Employee Retention Credit (ERC) claims, many of which were made at the urging of aggressive promoters. The IRS is offering a limited-time Voluntary Disclosure Program (VDP) to encourage taxpayers to come forward, allowing taxpayers to keep some of the refunds received and offering to waive penalties and interest, in exchange for the taxpayers identifying the promoters involved in their ERC applications. All VDP applications must be submitted by March 22, 2024.

What You Need to Know:

• The Voluntary Disclosure Program offers eligible taxpayers the opportunity to rectify potential errors in their employee retention credit claims by repaying only 80 percent of the credited amount.
• All Voluntary Disclosure Program applications must be submitted by March 22, 2024.
• Participation in the Voluntary Disclosure Program will require the disclosure of all preparer(s), advisor(s), and/or promoter(s) who assisted with the original claim for credit or refund.

We previously reported the IRS’s earlier actions relating to aggressive ERC claims. In September, the IRS implemented a moratorium on processing new ERC claims. In October, a special withdrawal process was unveiled to assist those who had filed ERC claims but not yet received or cashed refund checks. The new VDP is designed for taxpayers who have already received ERC refunds. 

The VDP offers eligible taxpayers an opportunity to rectify potential errors in their ERC claims by repaying only 80 percent of the credited amount, without a requirement to repay overpayment interest received with the refund. In addition, if the full 80 percent repayment is made prior to executing a closing agreement with the IRS, the IRS will not charge underpayment interest or penalties on the claimed ERC. If full repayment is not feasible at the time of the closing agreement, taxpayers may request an installment agreement, subject to review and acceptance of Form 433-B. Taxpayers who had not already amended income tax returns to reduce wage expenses as a result of receiving the ERC will not be required to do so if accepted into the VDP. Taxpayers who had filed amended returns reducing wage expenses may file a second amended return or an Administrative Adjustment Request claiming deductions for those wage expenses, even for expenses related to the 20 percent ERC retained. Taxpayers requesting an installment agreement to repay the 80 percent may be subject to standard penalties and interest. 

The IRS has published FAQs relating to the VDP, which may be accessed here. However, we caution taxpayers that FAQs may be changed without notice, and the IRS takes the position that it is not bound by FAQs. 

Eligibility Criteria for Application:

To be eligible for the program, taxpayers must meet the following requirements:

• Not be under criminal investigation or been notified that the IRS intends to commence a criminal investigation.
• Not have been reported by a third party to the IRS for the taxpayer’s noncompliance.
• Not be currently undergoing an IRS employment tax examination for the relevant period.
• Not have received any notice or demand for the repayment of ERC from the IRS.

Mechanics of the VDP Process:

• VDP applications are submitted using Form 15434. 
• Taxpayers who claimed the ERC using a third-party payer on an employment tax return filed under the third-party payer’s EIN may participate but only if the third-party payer submits the Form 15434.
• VDP applicants will be required to provide the IRS with contact information for any preparer(s) or advisor(s) who assisted with the claim for credit or refund, including a description of the services provided by the preparer or advisor.
• Any VDP applicants that include tax periods in 2020 will be required to sign a Form SS-10, Consent to Extend the Time to Assess Employment Taxes.
• After acceptance into the VDP, applicants will enter closing agreements with the IRS.
• Repayments must be made electronically through the IRS Electronic Federal Tax Payment System, separately for each tax period to which the VDP relates. If a VDP participant wishes to avoid underpayment interest and penalties, it must make payment by the time it returns the executed closing agreement to the IRS.