The March 22 deadline for applying to the IRS Voluntary Disclosure Program (VDP) to repay improperly claimed Employee Retention Credits (ERC) at a discount is just around the corner. The VDP requires businesses to repay only 80% of the improper credits they received while avoiding penalties and interest. It 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 to help businesses survive during the COVID-19 pandemic by encouraging them to keep employees on their payroll, ERC fraud has run rampant. 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.

Application to the VDP

To apply for the VDP, businesses must submit Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, using the IRS Document Upload Tool by 11:59 p.m. 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.

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.

No Immunity From Criminal Investigation or Prosecution

One of the most important complaints taxpayers and tax practitioners have with the VDP is that 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. While participants who successfully complete all VDP requirements are unlikely to face criminal prosecution related to their ERC claims, there are no guarantees unlike in other IRS voluntary disclosure programs.

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.

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.

The Takeaway

With an application deadline of this Friday, March 22, 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 wide-scale discounts and we do not expect any future ERC repayment program to be as generous. With the caveat that the VDP does not provide businesses with immunity from criminal investigations or prosecutions, it is otherwise one of the most taxpayer-friendly voluntary disclosure programs the IRS has offered in recent memory.

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