On December 21, 2023, the IRS launched a new Voluntary Disclosure Program (VDP) that allows businesses to pay back money received from erroneous Employee Retention Credit (ERC) claims. This program is intended to provide much-needed relief for taxpayers who were deceived by unscrupulous ERC promoters into filing improper claims for refunds. Further, the program will provide the IRS with the information it needs to pursue the promoters that perpetuated the deceptive and aggressive schemes.

ABOUT THE EMPLOYEE RETENTION CREDIT VOLUNTARY DISCLOSURE PROGRAM

The ERC VDP allows a taxpayer to repay 80 percent of the claim received in full satisfaction of a wholly incorrect claim. If the IRS paid interest on the ERC refund, a taxpayer does not have any obligation to repay that interest. For taxpayers who cannot repay the required 80 percent, an installment agreement may be requested and considered on a case-by-case basis by filing Form 433-B, Collection Information Statement for Businesses. Additionally, the IRS will not assert civil penalties related to the employment tax underpayment attributable to the claimed ERC so long as a taxpayer remits the full 80-percent payment prior to executing the closing agreement (described below).

The IRS generously selected 80-percent repayment since many ERC promotors charged a contingency fee and most businesses never received the full ERC refund amount. IRS Commissioner Danny Werfel noted that the ERC VDP’s 80 percent repayment is much more forgiving than the IRS will be in later action.

TAXPAYERS HAVE UNTIL MARCH 22, 2024 TO SUBMIT AN ERC VDP REQUEST.

HOW TO QUALIFY FOR THE VOLUNTARY DISCLOSURE PROGRAM

A taxpayer who has already received an ERC refund to which it is not entitled may utilize the ERC VDP if all of the following are also true:

1. The taxpayer is not under criminal investigation and has not been notified that they are under criminal investigation.
2. The taxpayer is not under an IRS employment tax examination for the tax period for which they are applying to the VDP.
3. The taxpayer has not received an IRS notice and demand for repayment of all or part of the ERC.
4. The IRS has not received information from a third party that the taxpayer is not in compliance or has not acquired information directly related to the noncompliance from an enforcement action.

Further, a taxpayer must provide the IRS with the names, addresses and telephone numbers of any and all advisors or tax preparers who advised or assisted them with their claim and details about the services provided.

Note that any taxpayer who has received one of the IRS’s 20,000 ERC disallowance letters mailed earlier in Dec. 2023 will not qualify for the VDP.

HOW TO APPLY FOR THE VOLUNTARY DISCLOSURE PROGRAM

To apply, a taxpayer must file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, using the IRS Document Upload Tool.

Taxpayers will be expected to repay their full ERC minus the 20-percent VDP allowance. Taxpayers who cannot pay in full may request an installment agreement under certain conditions.

Per usual, any practitioner that will represent a taxpayer must provide a completed Form 2848, Power of Attorney and Declaration of Representative.

Lastly, Form SS-10, Consent to Extend the Time to Assess Employment Taxes, must be submitted with Form 15434 if the ERC was claimed for any tax period ending in 2020.

Taxpayers that outsource their payroll to a professional employer organization (PEO) or other third party that reports, collects and pays employment taxes on the taxpayer’s behalf using the third party’s EIN must request that the third-party file Form 15434 on their behalf and attach relevant copies of Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, used to claim ERC for the participant.

AFTER APPLICATION APPROVAL

Once a taxpayer’s application is approved, the IRS will mail a closing agreement at which time the taxpayer must repay 80 percent of the ERC refund claimed, either online or by phone, and select the category “Advanced Payment.”

As previously mentioned, a taxpayer unable to pay the amount in full may enter into an installment agreement with the IRS to pay over time, but standard installment agreement policies, penalties and interest will apply. To avoid the administrative and financial burden of an installment agreement, the IRS recommends obtaining a loan from a financial institution to cover the repayment obligation. Once payment has been made, the taxpayer must return the signed closing agreement to the IRS within 10 days of the IRS mailing date.

ADDITIONAL INFORMATION ABOUT THE VOLUNTARY DISCLOSURE PROGRAM

• Denied VDP applications are not subject to judicial review or administrative appeal.
• Execution of a closing agreement under this VDP 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.
• Significantly, VDP participants are not required to reduce wage expenses with respect to any of the previously claimed ERC. If a taxpayer had not previously reduced wage expenses by any of the claimed ERC, participants do not need to file amended returns or Administrative Adjustment Requests (AARs). Participants who had previously reduced wage expenses for ERC amounts may file an amended return or AAR to increase the wage deduction.

ERC qualification, calculation, substantiation and remediation are complex and nuanced. Further, the heightened IRS scrutiny makes the ERC a high-risk area for many taxpayers. For any questions about the ERC and the new VDP, please contact GHJ’s Tax Practice.