IRS Announces ERC Voluntary Disclosure Program

The IRS recently announced a new voluntary disclosure program that will allow certain taxpayers to resolve erroneous Employee Retention Credit (ERC) claims by paying back just 80% of the credit without interest or penalties.

IRS Commissioner Danny Werfel describes the program as “a much-needed option for employers who were pulled into these claims and now realize they shouldn’t have applied.” The program is intended to help those who want to correct the error but may not have the ability to pay. Additionally, the 80% pay-back amount was selected to help taxpayers who may have previously paid a contingent fee to a promoter but never received the full amount.

Who Is Eligible?

To be eligible for the voluntary disclosure program, an employer must have received a credit or refund and must not:

1. Be under criminal investigation or have been notified that the IRS intends to conduct such an investigation;
2. Been reported to the IRS or been flagged by the IRS for non-compliance;
3. Be under audit for the tax periods that the taxpayer wishes to apply for the program; or
4. Have received notice and demand for repayment of all or part of the claimed ERC.

If a company has claimed the ERC and has not received the refund, or it has not cashed the refund, this voluntary disclosure program is not available. However, relief may be available via the withdrawal process announced by the IRS last year.

How Does It Work?

Employers wishing to participate in the program must file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, on or before 11:59 p.m. local time on March 22, 2024. For employers using a professional employer organization (PEO), the application will be submitted by the PEO. Once receiving the form, the IRS will prepare a closing agreement and mail it to the employer. The employer must then sign and return it to the IRS within 10 days. The payment amount is due via the Electronic Federal Tax Payment System (EFTPS) before execution of the agreement by the taxpayer unless the taxpayer has an approved installment payment plan.

The terms of the agreement include:

1. The participant is not eligible for any ERC for that tax period.
2. The participant will pay back 80% of the credit.
3. The participant will not be required to repay any overpayment interest received with the ERC claim, and if full payment of the 80% of the credit is repaid no underpayment interest will apply. Interest may apply if an installment agreement is made.
4. The participant will not be required to reduce its wages on its tax return for any portion of the ERC claimed and no income is recognized related to the resolution and payment of only 80% of the credit.
5. The participant must disclose the name, contact information, and services performed for any tax return preparer or advisor that assisted or advised in the ERC claim.
6. The IRS will not assert civil penalties for the underpayment of employment tax related to the ERC if the 80% payment is made in full by the execution of the agreement.
7. The participant will execute a closing agreement as described above.

If the application is denied by the IRS, the denial is not subject to appeal or judicial review. Also, it is important to note that execution of a closing agreement does not preclude the IRS from investigating criminal activity or recommending prosecution.

Enforcement

The IRS has made it clear that enforcement is a priority. It has released multiple warnings and added the ERC to the list of “Dirty Dozen” tax scams. The IRS also took the additional step of releasing two technical memos targeting positions widely used by promoters. Specifically, the IRS stated:

1. A supply chain disruption will not qualify taxpayers except for very limited circumstances.
2. CDC Guidance and the OSHA General Duty Clause do not constitute a government order and do not provide a basis for qualification.

In other words, the IRS believes many claims to be invalid.

Next Steps

If you have any concerns about your ERC claim, now is the time to work with a trusted professional to evaluate the claim. This voluntary disclosure program represents a unique opportunity, and there is a limited time to act if your claim is erroneous. For assistance, reach out to your KSM advisor or complete this form.