The Internal Revenue Service has announced a new Voluntary Disclosure Program (VDP) that offers businesses a limited-time opportunity to repay improperly claimed Employee Retention Credits (ERC) at a discount while avoiding penalties and interest. The VDP requires businesses to repay only 80% of the improper credits they received and has an application deadline of March 22, 2024.

Such voluntary repayment programs are rare, and the IRS is unlikely to offer a more generous discount. Any businesses that submitted an ERC claim should review their eligibility with a trusted tax professional to determine if they would benefit from applying for the VDP, which is outlined in this December 21, 2023 IRS announcement. The program is part of a larger federal effort to stop aggressive marketing of the ERC, which led many businesses to claim improper credits.

Background on the ERC

The ERC is a refundable tax credit. Businesses were and are entitled to claim it if, in general, they paid employees while (1) they shut down due to the COVID-19 pandemic or (2) they had significant declines in gross receipts from March 13, 2020 to Dec. 31, 2021. While Congress designed the ERC with the intent of helping businesses survive during the COVID-19 pandemic by encouraging them to keep employees on their payroll, ERC fraud has run rampant and unscrupulous promoters have pushed businesses that do not qualify for the credit to file fraudulent ERC claims. For almost two years, the IRS has engaged in a concentrated effort to stamp out improper ERC claims and the VDP provides additional incentives for taxpayers to repay improperly claimed credits.

IRS Commissioner Danny Werfel stated that “the disclosure program provides a much-needed option for employers who were pulled into these claims and now realize they shouldn’t have applied.” The IRS is only requiring businesses to repay 80% of the improper ERC they received, a 20% discount, because “we understand that there are 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 promotor that brought them into this mess. This new option, with an opportunity to get right with a lower financial cost, provides the relief these taxpayers requested. The new initiative will also help with our ongoing efforts to gather information on promoters who created this situation by aggressively pushing people to apply for the credit.”

Voluntary Disclosure Program Benefits

• If accepted into the VDP, businesses need only repay 80% of the ERC they received.
• If the IRS paid interest to the business on the ERC refund claim, the business does not need to repay the interest.
• The IRS will not assess any interest or penalties on repaid ERCs.
• Businesses that cannot immediately repay 80% of the ERC they received may qualify for an installment agreement but will be subject to penalties and interest.

Eligibility Requirements

Any business that received an ERC for which it did not qualify can apply if it meets all four of the following criteria:

• The business is not under criminal investigation and has not been notified that it is under criminal investigation (the IRS Announcement does not distinguish between a criminal investigation for ERC fraud and a criminal investigation for other reasons).
• The business is not undergoing an employment tax audit for the period(s) in which it will be repaying the ERC.
• The business has not received a notice from the IRS demanding repayment of all or part of the ERC.
• The IRS has neither received information from a third party that the business is not in compliance nor acquired information directly related to the noncompliance from an enforcement action.

Businesses that claimed the ERC through a third-party payer (such as a professional employer organization or a certified professional employer organization) under the third-party payer’s own employer identification number (EIN) rather than the taxpayer’s EIN are eligible to participate in the VDP, but the third-party payer must submit the application on the business’ behalf.

Application to the VDP

To apply to the VDP, businesses must submit Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, using the IRS Document Upload Tool by 11:59 pm on March 22, 2024. In the application, businesses must disclose the name, address, and telephone number of all advisers or tax preparers who advised or assisted them with claiming the ERC. If the IRS approves the VDP application, it will mail the business a closing agreement.

Repayment of the ERC

If the IRS approves the VDP application and sends the business a closing agreement, the business must then repay 80% of the ERC it received, on a period-by-period basis, rather than with a single lump-sum payment. Only after making payment (ideally online via the IRS EFTPS system) should business sign and return the closing agreement.

If the business cannot repay the credit before it signs the closing agreement, it will have the option of requesting an installment agreement from the IRS. Requesting an installment agreement requires the submission of a Form 433-B, Collection Information Statement for Businesses. Installment agreements will allow businesses to repay the ERC over time, but the IRS will impose penalties and interest. The IRS encourages businesses to consider obtaining third-party financing to repay the ERC to avoid the costs of an installment agreement.

No Immunity From Criminal Investigation or Prosecution

Executing a VDP closing agreement does not provide businesses with immunity from criminal investigations or prosecutions. The IRS may investigate VDP participants for any associated criminal conduct or recommend prosecution for violation of any criminal statute. However, as with prior IRS voluntary disclosure programs, participants who successfully complete all VDP requirements are unlikely to face criminal prosecution related to their ERC claims.

Additional 20,000 Disallowance Letters Issued

In early December 2023 the IRS announced that it would send 20,000 disallowance letters to businesses that did not exist or did not have employees during the ERC eligibility period but still claimed the ERC. In addition to this first batch of 20,000 letters, on December 21, 2023 the IRS stated that it has started mailing a second batch of up to 20,000 additional letters to businesses proposing tax adjustments to recapture erroneously claimed ERCs. This second batch of letters covers the 2020 tax year, and the IRS is planning additional mailings in 2024 to cover the 2021 tax year.

Withdrawal Program Update

To date, the IRS has received more than $100 million in ERC withdrawal requests related to the program it announced in mid-October (our update on the withdrawal program is here).The withdrawal program allows businesses to withdraw, without penalty, improperly claimed ERCs if the business has not received an ERC refund or has not cashed the ERC refund check. The IRS is continuing to accept and process requests to withdraw ERC claims and businesses have until at least the end of December 2023 to request a withdrawal.

The Takeaway

The VDP offers businesses a limited time opportunity to repay improperly claimed ERC at a discount while avoiding penalties and interest. The IRS rarely offers widescale discounts and we do not expect any future ERC repayment program to be as generous. Indeed, this VDP is one of the most, if not the most, taxpayer-friendly voluntary disclosure programs the IRS has offered in recent memory.

Taxpayers who submitted an ERC claim should review their eligibility with a trusted tax professional, especially if the business hired a tax credit promoter to file their claim. The ERC withdrawal program and VDP offer taxpayers a limited-time opportunity to resolve their ERC claims on favorable terms, but taxpayers must act quickly before the programs expire.

Businesses that are considering filing an ERC claim should heed the IRS’ advice, thoroughly review their ERC eligibility, and consult with a trusted tax professional before claiming the credit. Businesses that have already claimed the ERC but now doubt their eligibility should consult legal counsel about their options before they are contacted by the IRS.

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