Latest ERC Update: New Voluntary Disclosure Program

The Internal Revenue Service has, once again, announced a new initiative aimed at combating dubious Employee Retention Credit (ERC) claims. The IRS recently launched a new Voluntary Disclosure Program to help businesses pay back funds they may have 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 new repayment plan is the government’s latest attempt to combat fraudulent and ineligible claims for the ERC, along with offering many employers a way to avoid civil penalties. The IRS has started thousands of audits and hundreds of criminal prosecutions in regard to fraudulently filed claims.

Partial repayment is being allowed because many ERC promoters that offered employers help with filing the paperwork to claim the credit, charged a percentage fee, which averaged approximately 20% of the claim. It is questionable if this fee, which was collected at the time of the payment, will be refunded by the promoters if the claim is deemed ineligible.

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 allowed to enter into an installment agreement which will include penalties and interest.

“The disclosure program provides a much-needed option for employers who were pulled into these claims and now realize they shouldn’t have applied,” said IRS Commissioner Danny Werfel. “From discussions we have had with taxpayers and tax professionals around the country, we understand that there are many employers eager to correct their error, but who remain concerned about their ability to pay back the portion of the credit that has been lost to the promoter that brought them into this mess.”

To qualify for this program, the employer must provide the IRS with the names, addresses and telephone numbers of any advisors who advised or assisted them with their claim, including details about the services provided.

Who can apply?

A variety of ERC recipients can apply. Any employer who already received the ERC for a tax period but wasn’t 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’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 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.

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.

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.

If you feel that the new Voluntary Disclosure Program applies to you, or you have any questions regarding the ERC, please reach out to your LMC professional for assistance and guidance.