Background:

During the COVID quarantine, congress enacted the Employee Retention Tax Credit (“ERTC”).  The purpose of the credit was to provide funds for employers whose business activity was reduced or shut down because of COVID.

As a result of this, tax advisors appeared who agreed to help employers file ERTC claims requesting payments in exchange for a portion of the payment that would be received by the employer.  A review of these advisors’ activity indicates that many of the claims that they told employers qualified for the credit did not.  If these claims are not withdrawn, employers could suffer penalties as high as 75% of the amount of the claim.  If the employer received payment, the employer would also have to return payment.  In addition, they would have to amend the income tax returns for the tax years involved in the claim.

Voluntary Disclosure Program:

In order to finalize the repayment of ERTC improper payments received by employers, the Internal Revenue Service has created the Employee Retention Credit Voluntary Disclosure Program.

 If an employer received a payment from the IRS and the taxpayer has determined that the taxpayer is ineligible, the taxpayer should enter into the Voluntary Disclosure Program (“VDP”).

Features of the Program:

1. Only 80% of the money needs to be returned.  Interest does not need to be returned.

2. Amended income tax returns adding back wage expenses are not required.

3. The 20% reduction is not taxable income for federal purposes.

4. There will be no penalties or interest if the tax is paid in full

5. Refund claims that were filed will not be subject to examination.

6. If a third party prepared and filed taxpayer’s refund claim, taxpayer must have that party apply to the VDP for the taxpayer.

7. If a taxpayer is unable to pay the full amount, the taxpayer can request a payment plan.  In doing this you must file Form 433-B along with all required documents and submit it with the VDP application.

8. All applications must be submitted on or before March 22, 2021.

What happens if you don’t participate:

If your claim is examined, you could be subject to interest and penalties as high as 75% of your claim.  Under current law. The IRS has five years to examine taxpayers’ claims.

What to do?

You should have your tax advisor review your claim as soon as possible, and if it is defective, it should be withdrawn.  If you have received a refund, you should be prepared to pay it back before March 27, 2024 or propose a payment plan.