The IRS has concerns about scams regarding employee retention credit (ERC) claims based on false and misleading public advertisements and scams targeting businesses. In early December, the IRS sent letters to 20,000 taxpayers advising them that their ERC claims were disallowed because the business either did not exist or did not have paid employees for the period. Subsequently, the IRS began another campaign to send an additional 20,000 letters trying to recapture erroneously claimed ERC credits.
In an effort to address these issues and assist businesses who were induced into claiming ERC and now believe they were not eligible, the IRS introduced a voluntary disclosure program (VDP) as outlined in IRS Announcement 2024-3. The program, running until March 22, 2024, aims to assist businesses in rectifying questionable ERC claims, particularly those exploited by unscrupulous ERC promoters targeting small businesses.
Key details include:
Repayment Requirement: Qualifying business repays 80% of the ERC funds received – allowing participants to retain 20% of funds under the assumption that some ERC promoters charged a percentage fee. Businesses unable to make immediate full repayment of the 80% may be considered for an installment agreement.
Interest Waiver: IRS will not impose interest on the repayment amount, although interest will be applied to installment agreements.
Civil Penalty Exemption: IRS will not assert civil penalties related to underpayment of employment tax attributable to the ERC.
Promoter Disclosure: Participating business must disclose names and contact information of ERC promoters they utilized and cooperate with the IRS for additional information requests.
Application Submission: Businesses wishing to participate must submit Form 15434, “Application for Employee Retention Voluntary Disclosure Program” on or before March 22, 2024.
Ineligible businesses include those:
- Under criminal investigation.
- Under an IRS employment tax examination for the affected tax period.
- That have already received an IRS notice and demand for repayment for all or part of the ERC.
- For which the IRS has already obtained noncompliance information from a third party or an enforcement action.
Under the VDP, if a business has not already amended 2020 or 2021 tax returns to reduce wage deductions for the ERC, no amendment is required. Also, the 20% reduction in repayment of the ERC is not taxable as income, and interest and penalties will not be charged on the repayment if the 80% of ERC is repaid. With the VDP, the IRS agrees not to examine your employment tax returns for the ERC resolved under the program.
If you filed amended payroll returns to claim the ERC but the IRS has yet to process the claims and issue refunds, you are not eligible for the ERC VDP. However, if you determine that your claim was erroneous, you may be able to use a claim withdrawal process instead.
Businesses considering participation in this voluntary disclosure program should check with their attorneys for guidance and remember the VDP is a limited time offer only available through March 22!