IRS Reopens Voluntary Disclosure Program for Employee Retention Credit Claims

The IRS has temporarily reopened its Voluntary Disclosure Program (VDP), providing businesses with an opportunity to correct inaccuracies in their Employee Retention Credit (ERC) claims. This initiative allows companies to repay mistakenly claimed ERC funds with a 15% reduction and helps them avoid potential audits, penalties, or interest fees. The VDP will remain open until November 22, 2024.

By reopening the VDP, the IRS aims to encourage more businesses to come forward voluntarily and resolve errors before enforcement increases. The IRS is advising businesses that claimed ERC payments to thoroughly review their submissions to ensure they qualified for the credit. Additionally, they recommend consulting a tax professional to assess whether the VDP is a suitable option. While the VDP offers some protection from future audits and penalties, it does not protect against investigations involving fraudulent claims.

In this phase of the program, the repayment discount has been reduced to 15%, compared to 20% in the earlier round. This fall, the IRS will send out letters seeking to recover over $1 billion from businesses with questionable claims. Once a business receives this letter, it will no longer be eligible to participate in the VDP, making it crucial to act promptly.

Businesses can also choose to use the ERC Claim Withdrawal Program, which allows them to withdraw incorrect or pending claims before they are processed.

What to Know About the ERC

The Employee Retention Credit (ERC), introduced under the CARES Act, was designed to support businesses that continued paying employees during the COVID-19 pandemic. This refundable tax credit allows companies to reduce their employment taxes based on the wages paid to their staff. The credit applies to wages paid between March 13, 2020, and December 31, 2021, and can be claimed either on original tax filings or through amendments.

To qualify for the ERC, businesses must meet one of the following criteria:

• Experienced a partial or full suspension of operations due to government mandates during 2020 or the first three quarters of 2021.
• Suffered a significant drop in gross receipts during 2020 or the first three quarters of 2021, as defined by IRS guidelines.
• Qualified as a recovery startup business in the third or fourth quarters of 2021, under IRS Notice 2021-49.

Since late 2022, the IRS has been warning businesses about fraudulent ERC schemes, which by March 2023, ranked at the top of the IRS’s “Dirty Dozen” list of tax scams. As questionable claims increased, the IRS paused ERC processing in September 2023.

If you have concerns about your ERC claim or need assistance navigating the IRS’s current actions, LMC’s experienced professionals are available to help you understand your options and find the best solution for your business.