IRS Launches Employee Retention Credit Voluntary Disclosure Program
As part of an ongoing initiative aimed at combating dubious Employee Retention Credit (ERC) claims, the IRS recently launched a new Voluntary Disclosure Program to help businesses who want to pay back the money they received after filing ERC claims in error.
The new disclosure program, which has been in the works for several months, is part of a larger effort at the IRS to stop aggressive marketing around the ERC that misled some employers into filing claims. The special disclosure program runs through March 22, 2024, and the IRS added provisions allowing repayment of 80% of the claim received.
The IRS also continues to urge employers with pending ERC claims to consider a separate withdrawal program that allows them to remove a pending ERC claim with no interest or penalty. The IRS has already received more than $100 million in withdrawals as the agency continues intensifying audits and criminal investigation work in this area.
As these special initiatives for the ERC continue, the IRS will provide an update in the new year on the status of the moratorium. Additionally, the IRS mailed out 20,000 denial letters to ERC claimants earlier this month.
Interested employers must apply to the ERC Voluntary Disclosure Program by March 22, 2024. Those that the IRS accepts into the program will need to repay only 80% of the credit they received. If the IRS paid interest on the employer's ERC refund claim, the employer does not need to repay that interest. Employers who are unable to repay the required 80% of the credit may be considered for an installment agreement on a case-by-case basis, pending submission and review of a Form 433-B, Collection Information Statement for Businesses, available on IRS.gov, and all required supporting documentation.
The IRS will not charge program participants interest or penalties on any credits they repay. However, if the employer is unable to repay the required 80% of the credit at the time of signing their closing agreement, then the employer will be required to pay penalties and interest in connection with entering into an installment agreement.
The IRS selected an 80% repayment because many of the ERC promoters charged a percentage fee that they collected at the time of payment or in advance of the payment, and the recipients never received the full amount.
To qualify for this program, the employer must provide the IRS with the names, addresses and telephone numbers of any advisors or tax preparers who advised or assisted them with their claim and details about the services provided. Further qualifications and program details are in Announcement 2024-3.
As part of this expanding effort for employers that claimed an erroneous or excessive ERC, the IRS also announced it has started sending up to 20,000 letters with proposed tax adjustments that will recapture the erroneously claimed ERC. These mailings – which are on top of the 20,000 denial letters announced earlier in December – are currently just for tax year 2020, and work continues for tax year 2021, with additional mailings planned. If the IRS identifies an employer that has received excessive or erroneous ERC, the agency will reclaim that ERC through normal tax assessment and collection procedures.
Program Eligibility
A variety of ERC recipients can apply. Any employer who already received the ERC for a tax period but is not entitled to it can apply if the following are also true:
- The employer is not under criminal investigation and has not been notified that they are under criminal investigation.
- The employer is not under an IRS employment tax examination for the tax period for which they are applying to the Voluntary Disclosure Program.
- The employer has not received an IRS notice and demand for repayment of part or all of the ERC.
- 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.
How To Apply
To apply, the employer must first file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, available on IRS.gov. This form must be submitted using the IRS Document Upload Tool. Employers will be expected to repay their full ERC minus the 20% reduction allowed through the Voluntary Disclosure Program. Employers who are not able to pay the amount in full will have the option to set up an installment agreement under certain conditions.
Many employers outsource their payroll obligations to a third party who reports, collects and pays employment taxes on the employer's behalf using the third party's Employer Identification Number. In this situation, the third party, not the employer, must file Form 15434. See the form and its instructions for details.
Help for Applicants
As part of a larger set of information on the ERC, the IRS has provided a set of frequently asked questions to help employers understand the terms of the program.
Once the employer has applied to the program and submitted their Form 15434, an IRS employee will contact them to go over the application and answer any questions.
Next Steps After Approval
If the IRS approves the employer's application, they will mail the employer a closing agreement. The employer must then repay 80% of the ERC they received, either online or by phone, using the Electronic Federal Tax Payment System (EFTPS). EFTPS is the Treasury Department system that most businesses already use to pay various federal tax obligations.
If the taxpayer is unable to pay the amount in full, they may enter into an installment agreement with the IRS to pay over time. However, under the standard installment agreement policy, penalties and interest will apply, so the IRS encourages those who cannot pay in full to consider obtaining a loan from a financial institution to avoid the costs of an installment agreement with the IRS. Once payment has been made, the employer must return the signed closing agreement to the IRS.