Since July 2023, the IRS has taken a series of actions in response to what it has termed a “flood of ineligible claims” for the Employee Retention Tax Credit (ERC). Most recently, it launched a Voluntary Disclosure Program (VDP). The program presents a valuable, but temporary, opportunity for eligible employers.
Flood of invalid ERC claims
The ERC is a refundable tax credit intended for businesses that: 1) Continued paying employees while they were shut down due to the pandemic in 2020 and 2021; or 2) Suffered significant declines in gross receipts from March 13, 2020 to December 31, 2021.
With the credits worth up to $26,000 per retained employee, fraudulent promoters and marketers quickly pounced, offering to help employers file claims in exchange for large upfront fees or percentages of the money received. However, the requirements for the credit are stringent, and many employers were misled into filing claims that have proven to be invalid, leaving those claimants at risk of liability for credit repayment, penalties and interest, as well as other tax problems.
The IRS response
In the face of the deluge of invalid claims, the IRS intensified audits and criminal investigations of both promoters and businesses filing suspect claims. As of December 2023, it had more than 300 criminal cases underway with claims worth nearly $3 billion, and thousands of ERC claims had been referred for audit.
The IRS also has instituted a moratorium on the processing of new ERC claims. And, in October 2023, the agency began offering a withdrawal option for eligible employers that filed a claim but have not yet received, cashed or deposited a refund. Withdrawn claims will be treated as if they were never filed, so taxpayers need not fear repayment, penalties or interest.
In late December 2023, the IRS announced another ERC relief initiative, the VDP. The program is intended for employers that claimed and received credit money but were not entitled to it.
VDP nuts and bolts
Employers that participate in the VDP may benefit in several ways. For example, they are required to repay only 80% of the credit received (if repayment in full is not possible, the IRS may authorize an installment plan). Also, they are not required to repay any interest received on an ERC refund or amend their income tax returns to reduce wage expense. Employers that have already reduced wage expense may amend their income tax returns again to fully reverse the wage expense reduction.
These employers will not be subject to penalties or underpayment interest if the 80% repayment is made before the signed closing agreement is returned to the IRS. The 20% reduction will not be treated as taxable income, and the IRS will not audit the ERC on employment tax returns for the tax periods covered by the closing agreement.
An employer can apply for the VDP for each tax period in which:
- Its ERC claim was: 1) Processed and paid as a refund that has been cashed or deposited; or 2) paid in the form of a credit applied to that or another tax period;
- It was entitled to zero ERC;
- It is not under IRS audit for employment taxes;
- The IRS does not have information from a third party alerting it of the employer’s ERC noncompliance;
- The IRS does not have information directly related to the employer’s ERC noncompliance from an enforcement action;
- The employer has not reversed its ERC claim to zero; and
- The IRS has not reversed, or notified the employer of its intent to reverse, the ERC to zero (for example, with a letter or notice disallowing the credit).
If a third-party payer filed an employment tax return that reported an employer’s ERC-related wages and credits, the employer can participate in the VDP only through the third-party payer. It will be rejected if it applies with its own employer identification number.
An employer that satisfies the above conditions is urged to apply for the VDP as quickly as possible because once the employer is identified by the IRS as receiving excessive or erroneous ERCs, the employer becomes ineligible to participate in the VDP, and the IRS will pursue normal tax assessment and collection procedures.
Bear in mind that not every ERC claim was invalid. If you are at all uncertain about the validity of your claim, regardless of whether you have received payment, your ORBA advisor can help you navigate this increasingly complex area. The VDP is open only until March 22, 2024, so do not delay. For more information, please contact Michael Loesevitz at [email protected] or 312.670.7444.