The IRS has launched a second Employee Retention Credit (ERC) Voluntary Disclosure Program to enable businesses to resolve incorrect ERC claims without penalties or interest.
The second Voluntary Disclosure Program (VDP) will run through November 22, 2024, and allow businesses to correct improper payments at a 15% discount and potentially avoid future audits, penalties and interest.
The ERC, created during the COVID-19 pandemic to support businesses that retained their workers on payroll, experienced a large number of improper and fraudulent applications, to the extent that the IRS placed a moratorium on new claims in mid-2023. In many cases, business owners were duped by unscrupulous advisors into filing fraudulent ERC claims. The advisors, many of whom operated from pop-up “tax shops” and engaged in aggressive marketing tactics, charged a percentage of the ERC claims as their fees, creating a financial incentive to encourage companies to file claims for which they did not qualify.
As of November 2023, the IRS Criminal Investigation Unit had conducted 323 investigations into a suspected $2.8 billion worth of fraudulent ERC claims. As the IRS continues intensifying compliance work involving improper ERC claims, the second VDP can protect businesses from potential costly compliance action in the future, such as audits, full repayment, penalties and interest. Full details are available in IRS Announcement 2024-30.
The IRS created the first Voluntary Disclosure Program in December 2023, which ended March 22, 2024, to help businesses pay back any money they received after filing ERC claims in error. However, businesses were only required to pay back 80% of the ERC received to assist in offsetting fees paid to these third party providers. In addition, the amounts that were retained were not considered taxable income and there was no need to reduce wages for the year from which the ERC was claimed (2020 or 2021).
As with the first round of the VDP, the reopening of ERC VDP is designed to help businesses with questionable claims self-correct and repay the credits they received after filing ERC claims in error. As part of the effort, the IRS is sending up to 30,000 letters to claimants to reverse or recapture potentially more than $1 billion in improper ERC claims. A couple differences with the second program exist. This VDP is only for 2021 claims. Also, instead of repaying 80% of the ERC received, the requirement is to repay 85%.
Eligibility
The following companies are eligible:
- Your ERC claimed on a 2021 employment tax return has been processed and paid as a refund, which you have cashed or deposited, or paid in the form of a credit applied to the tax period or another tax period.
- You now think that you were not entitled to an ERC refund.
- You’re not under employment tax examination (audit) by the IRS.
- You’re not under criminal investigation by the IRS.
- The IRS has not reversed or notified you of intent to reverse all or part of your ERC. For example, you received a letter or notice from the IRS disallowing your ERC.
To help businesses caught in this situation, the IRS urges business owners to review important warning signs and eligibility requirements, and to talk to a trusted tax professional to see if the VDP is a good option. The IRS’s ERC Eligibility Checklist can also help businesses understand eligibility requirements and suggest next steps.
For businesses that have not yet received refunds on ERC claims that may have been filed in error, the IRS’s claim withdrawal program remains open.
If you have any questions about an ERC refund you have received, or about a claim you have filed but not yet received a refund for, contact your KRD advisor.
