Voluntary Disclosure Program for Questionable Employee Retention Credits

Thanks to David W. White, Principal in our Peoria, Illinois agribusiness group, for the content of this post.

As we have discussed in previous posts, the Employee Retention Program (ERC) has been ripe for fraud.  Do you think your ERC claim was too aggressive and you are now worried that your eligibility for this pandemic related program is in question?  You are certainly not alone. The IRS recognizes that many honest businesses were encouraged by aggressive marketing around ERC that misled some employers into filing claims.  As a result, the IRS came out with Announcement 2024-3 that describes the Voluntary Disclosure Program.  It provides procedures, to qualifying employers, to pay back 80% of the money they received.

The ERC is a refundable tax credit intended for businesses and tax-exempt organizations that continued to pay employees during the pandemic if their operations were fully or partially suspended due to a government order, they experienced the required decline in gross receipts, or they were a recovery startup business during the relevant eligibility periods.

During the past months, the IRS has made announcements regarding scams and potential fraud for ERC claims.  They also announced that those who filed and erroneously received ERC will face enforcement action, including assessment of penalties and interest.  However, with this new program, you have a chance to participate in this Voluntary Disclosure Program and avoid that potential ugliness of civil litigation, penalties, and interest.  This program is for taxpayers that have received refunds and deposited them.  There is a different process for withdrawing a claim where the taxpayer has yet to receive funds or deposit them.

First, you have to eligible to participate in the program.  Announcement 2024-3 says:

Any participant that has claimed the ERC and has received a credit or refund is eligible to participate in this Voluntary Disclosure Program, provided that:

1. The participant is not under criminal investigation and they have not been notified that the IRS intends to commence a criminal investigation;
2. The IRS has not received information from a third party alerting the IRS to the participant’s noncompliance , nor has the IRS acquired information directly related to the noncompliance from and enforcement action;
3. The participant is not under an employment tax examination by the IRS for any tax period(s) for which the taxpayer is applying for this Voluntary Disclosure Program; and
4. The participant has not previously received notice and demand for repayment of all or part of the claimed ERC.

Following the terms of this program, the participant will remit back to the IRS 80% of the ERC, including both the refundable and non-refundable portions.  The participant is bit required to repay any overpayment interest received and if the taxpayer pays the entire 80% in full, no underpayment interest will apply.  The IRS is also reviewing applications for installment agreements if the taxpayer cannot repay in full.  The IRS recognizes that many of the ERC promoters charged a percentage fee that the collected at the time of payment or in advance.

Announcement 2024-3 also spells out the income tax effects.  The regulations required that employers reduce their wage expense reported on their tax returns for the year of the ERC claim with respect to any of the previously claimed ERC on original or amended income tax returns.  This Voluntary Disclosure Program eliminates a participant’s eligibility for and/or entitlement to all the claimed ERC, and as a result, participants are not required to reduce wages.  So, if you have not filed an amended return to claim a reduction in wages as a result of receiving the credit previously, you do not need to file an amended return now.  If you did reduce your wages, then amendment would be necessary.  In other words, the participant/employer has no income with respect to the resolution of the employment tax obligation by remittance of payment of only 80% of the claimed ERC, including both the refundable and non-refundable portions.

All of this is accomplished by filing form 15434, Application for Employee Retention Credit Voluntary Disclosure Program.  There is a deadline to do this.  Applications must be submitted on this form with any related attachments by March 22, 2024 via the Document Upload Tool at irs.gov/DUT. It is important to note that this form requires the participant to disclose the names, addresses, and telephone numbers of the advisors or tax preparers who advised or assist them with the ERC claims.

If you used a third-party agent to previously submit the ERC claim, you will need that third-party agent assistance.  Consider this a good deal.  The IRS is well-aware of who the promoters are in these claims and the Criminal Investigation Unit will ultimately connect the dots.