Since highlighting the Employee Retention Credit (ERC) on its annual Dirty Dozen list of tax scams, the IRS’ latest measure to help correct an influx of inaccurate credit claims is the introduction of a new Voluntary Disclosure Program. Announcement 2024-3, released on December 21, 2023, explains the details of the program and how the IRS aims to provide ineligible businesses that received the credit a means to rectify their erroneous claims. This program is part of a larger effort by the agency to curb aggressive and inaccurate advertisements from third-party ERC promoters.
This post discusses the circumstances leading to this program’s initiation and provides details regarding the program and how to apply.
What Factors Prompted the Voluntary Disclosure Program?
The ERC was enacted as a part of the 2020 CARES Act to help businesses affected by the COVID-19 pandemic. It is a refundable credit that is available to businesses and tax-exempt organizations that paid qualified wages to employees after March 12, 2020, and before January 1, 2022, and either:
- Were shut down by a government order due to the COVID-19 pandemic during 2020 or the first three calendar quarters of 2021, or
- Experienced the required decline in gross receipts during the eligibility periods during 2020 or the first three calendar quarters of 2021, or
- Qualified as a recovery startup business for the third or fourth quarters of 2021
Over the past couple of years, with the passing of various legislation, the guidelines for claiming the ERC were relaxed, prompting opportunistic promoters to encourage businesses to apply for the credit even if they did not meet qualifications. Some promoters ran aggressive advertisements stating that every business could claim the ERC without first assessing the individual circumstances of each business. When businesses received funds from the false credit claims, the ERC promoters often collected a percentage. Many companies responded to these advertisements and erroneously claimed the ERC.
The IRS is well aware of the aggressive marketing tactics of credit promoters and previously announced instructions for employers looking to withdraw their claims requesting a refund for an ERC. This withdrawal option is only available to businesses that have not yet received or cashed the check for the credit. Employers that had already received their credit were not eligible for this withdrawal process. The IRS continues to encourage those who qualify for the special withdrawal process to utilize it.
What is the Voluntary Disclosure Program?
Because employers that have already received ERC payments are ineligible to apply for the withdrawal program, the IRS developed an alternative for them. The new disclosure program the IRS announced in December is an option for businesses that want to repay the funds they received from erroneous ERC claims. The agency warns that employers wrongly claiming the ERC may face collection and enforcement action by the IRS. Following discussions with taxpayers and tax professionals, the IRS recognized that many employers were eager to rectify their erroneous claims but expressed concerns regarding full repayment since a percentage of the funds had already been paid to ERC promoters. The new program addresses this concern, allowing employers to repay 80% of the funds received without penalty or interest.
How Does the Voluntary Disclosure Program Work?
Any employer who claimed the ERC but were must submit applications by March 22, 2024. The employers must identify the tax preparers or promoters who assisted them in making the erroneous claims. The IRS will review the employers’ applications, and they must repay 80% of the credit they received upon acceptance. Employers who cannot repay 80% can apply for an installment agreement that the IRS may approve on a case-by-case basis. However, unlike those who can repay 80% of the credit, the agency will charge those approved for installment agreements interest and penalties.
Additionally, because the ERC could not be claimed on wages included as a wage expense, employers had to reduce their wage deductions by the corresponding ERC amount. Those participating in the new program have the option to file an amended income tax return to adjust for the amount of the wage expense reduced from the ERC. Any employers who have not already reduced their wage deductions for the ERC, do not need to file amended returns.
Who is Eligible to Apply for the Voluntary Disclosure Program?
Any employer who erroneously claimed the ERC can apply as long 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’re 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 Do Employers Apply for the Voluntary Disclosure Program?
Employers must complete and file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, by March 22, 2024. If the employer’s application includes a tax period ending in 2020, they must also complete Form SS-10 to extend the time for assessing employment taxes. Those who need an installment agreement must also include Form 433-B, Collection Information Statement for Businesses.
To help the IRS gather information about ERC promoters, employers applying through this program must furnish the IRS with information about the parties who helped them claim the credit, including their names, addresses, telephone numbers, and details about the services provided.
The IRS will review all applications for eligibility and send letters notifying employers if they are accepted into the program. Those accepted employers will be required to sign a closing agreement and pay the agreed-upon amount.
The new voluntary disclosure program is the latest effort by the IRS to address the flux of fraudulent ERC claims. Employers who suspect ERC promoters misled them and wrongly claimed the ERC should consider this opportunity and apply for this program to rectify their error.
You can learn more about this topic at the upcoming Get Ready for Filing Season webinar on January 25.
By Ashley Akin, CPA
IRS announces details for ERC Voluntary Disclosure program (rsmus.com).
IRS Pub. 5887, Employee Retention Credit Eligibility Checklist.
IR-2023-247, New Voluntary Disclosure Program lets employers who received questionable Employee Retention Credits pay them back at discounted rate.
IRS Announcement 2024-3, Employee Retention Credit Voluntary Disclosure Program.