On December 21, 2023, the Internal Revenue Service (IRS) issued Announcement 2024-3, setting forth the parameters of a voluntary disclosure program (the “Program”) for taxpayers to resolve Employee Retention Tax Credit (ERTC) claims that have resulted in the taxpayer receiving an erroneous credit or refund.[1] For those following the news reports, the IRS has identified rampant fraud (not all claims, of course) in the ERTC; the IRS is offering, through the Program, some especially generous alternatives for taxpayers who may be having second thoughts on having claimed the ERTC. Taxpayers must act quickly; participation in the Program is available only for a limited period of time, as described below.
Background on ERTC and the Program
The ERTC is a refundable tax credit intended for businesses and tax-exempt organizations that continued paying employees during the COVID-19 pandemic if their operations were fully or partially suspended due to a government order, they experienced the required decline in gross receipts, or they were a recovery startup business during the relevant periods. The eligibility requirements, applicable time periods, and dollar limitations for claiming the ERTC have changed several times due to the passage of a series of federal bills, resulting in a complex set of rules for calculating and claiming the ERTC. Additional information regarding certain recent IRS guidance on the ERTC is available here.
Aggressive ERTC promoters made false and misleading public advertisements regarding the eligibility requirements for the ERTC, leading to IRS concerns that fraudulent claims are being made and that taxpayers may be exploited. In the absence of the Program, taxpayers that filed for and erroneously received the ERTC may face enforcement action from the IRS for recovery of the ERTC (along with potentially material penalties and interest) through assessment and collection procedures. The IRS adopted the Program to staunch the bleeding–offering taxpayers the ability to resolve their ERTC civil tax liabilities, avoid potential civil litigation, and avoid penalties and interest.
Eligibility for the Program
Taxpayers that have claimed the ERTC and received a credit or refund are eligible to participate in the Program if:
- The taxpayer is not under criminal investigation and they have not been notified that the IRS intends to commence a criminal investigation;
- The IRS has not received information from a third party alerting the IRS to the taxpayer’s noncompliance, nor has the IRS acquired information directly related to the noncompliance from an enforcement action;
- The taxpayer is not under an employment tax examination by the IRS for any tax period(s) for which the taxpayer is applying for the Program; and
- The taxpayer has not previously received notice and demand for repayment of all or part of the claimed ERTC.
Terms of the Program
Eligible taxpayers pay back only 80% of the claimed ERTC (including both the refundable and non-refundable portions) and execute a closing agreement. If the IRS paid interest on the amount of the ERTC received, the taxpayer is not required to repay the interest. Generally the taxpayer can avoid interest and penalties. If a return preparer or advisor assisted or advised the taxpayer with any portion of the ERTC claim, the taxpayer must identify the preparer or advisor and a description of services provided.
Settlement of the ERTC pursuant to the Program eliminates the taxpayer’s eligibility for the ERTC (so amendments to income tax returns for prior years may be needed to adjust the deductions claimed for the applicable wage expense). Taxpayers participating in the Program have no income arising from the resolution of the employment tax obligation by remittance of only 80% of the claimed ERTC.
If the tax period(s) for which the ERTC was claimed include any tax period ending in 2020, taxpayers will be required to consent to an extension of the statute of limitations for the 2020 tax period(s) in order to participate in the Program. Execution of a closing agreement under the Program does not preclude the IRS from investigating any associated criminal conduct or recommending prosecution for violation of any criminal statute, and does not provide any immunity from prosecution.
How to Apply to Participate in the Program
In order to participate in the Program, taxpayers must complete and submit an application for the Program on Form 15434 by March 22, 2024. Participants must submit Form 15434 and any required attachments electronically. If the taxpayer claimed the ERTC under a third-party’s employer identification number, then the third-party must file the Form 15434.
Additional Resources
The IRS website provides answers to certain frequently asked questions relating to the Program.
[1] A separate withdrawal process is available for taxpayers that have submitted a claim for the ERTC and have not yet received it (or who received a check but haven’t cashed or deposited it). Details on how to withdraw such ERTC claims are available here.
