The Internal Revenue Service (the “IRS” or the “Service”) has finally announced details related to its previously teased and highly-anticipated Employee Retention Credit Voluntary Disclosure Program (“ERC-VDP” or the “Program”).  The ERC-VDP is in effect from December 21, 2023, until 11:59 p.m. local time on March 22, 2024,1 and allows employers who made improper ERC-related refund claims to repay the erroneous refund and potentially avoid repaying statutory interest and penalties.  Specifically, the employer is permitted to retain 20 percent of the claimed ERC refund and must repay only 80 percent of the credit.2 Additionally, if the employer repays the ERC in full before executing the mandatory closing agreement, no interest or penalties will be assessed.

ERC-VDP may be ideal for employers who may have made errors while navigating the complexities of ERC, such as large employers who did not consider complicated aggregation rules or who had more than 100 full-time employees in 2019 (for 2020 quarters) or more than 500 full-time employees in 2019 (for 2021 quarters). The Program may also be beneficial for employers who miscalculated their gross revenue or mistakenly used accrual basis accounting instead of cash basis, or vice versa. Additionally, ERC-VDP could be optimal for employers who claimed ERC for all quarters but where governmental orders may have been lifted by a certain date and the employer is potentially not eligible for later quarters (e.g., refund claims made on Q3 2021 returns).

Have Questions? Call us for Your consultation.

Who is Eligible for the ERC-VDP?

Employers that claimed ERC and received a credit or refund are eligible to participate in the Program subject to four requirements: 3

  1. The participant is not under criminal investigation and has not been notified that the IRS intends to commence a criminal investigation;
  2. The Service has not received information from a third-party of the participant’s noncompliance, nor has the IRS acquired information directly related to the noncompliance from an enforcement action;
  3. The participant is not currently under an employment tax audit by the IRS for any tax period for which the employer is applying for ERC-VDP; and
  4. The participant has not previously received a notice and demand for repayment of all or part of the claimed ERC.

What Are the Terms of the ERC-VDP? 4

  1. The participant is not eligible for, or entitled to, any ERC for the tax period(s) at issue.
  2. The participant will repay 80 percent of the claimed ERC, including both the refundable and non-refundable portions of the credit.
  3. The participant will not be required to repay any overpayment interest received in conjunction with the credit, and if the participant makes full payment of 80 percent of the claimed ERC prior to executing the mandatory closing agreement, the Service will not assess underpayment interest on the repaid amount. If the taxpayer requests an installment agreement in lieu of full payment, interest may apply from the agreement date.
  4. Participants are not required to reduce the wage expense deducted on the original income tax return with respect to any previously-claimed ERC. If the taxpayer had not previously reduced the wage expense by the amount of ERC received, either on an original or amended tax return, no amendment is necessary. If the taxpayer had previously reduced the wage expense, they need not reduce the wage expense by any of the claimed ERC if they file an amended return to adjust the previous reduction to wage expenses. Additionally, the amount of ERC able to be retained (20 percent) is not considered income to the taxpayer.
  5. If a return preparer or advisor assisted or advised the participant with any portion of the ERC, the participant must provide the name, address, and phone number of the preparer(s) or advisor(s).
  6. The IRS will not assert civil penalties relating to the underpayment of employment tax attributable to ERC against a participant that remits full payment of 80 percent of the claimed ERC prior to executing the closing agreement.
  7. The participant must execute a closing agreement, which is an agreement mailed to the participant by the IRS. The agreement must be signed and returned within 10 days of the date of mailing by the Service.5

How Do You Apply for the ERC-VDP? 6

Participants must complete and submit Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, electronically using the IRS’s Document Upload Tool.

This form, which is signed under penalties of perjury, must include the following items:

  • The taxpayer’s name, taxpayer identification number, current address, and phone number. Taxpayers who are being represented by a tax practitioner regarding the ERC-VDP must also provide a completed Form 2848, Power of Attorney and Declaration of Representative;
  • The tax period(s) for which ERC was claimed, the form on which it was claimed, and the full amount of ERC claimed (including both the refundable and non-refundable amounts);
  • If the tax period(s) for which ERC was claimed include any tax period in 2020, a completed and signed Form SS-10, Consent to Extend the Time to Assess Employment Taxes, must be submitted with Form 15434;
  • If ERC was claimed by a third-party payer on behalf of the participant, such as with a Professional Employer Organization (PEO), the third-party payer must attach a copy of the relevant pages of the Schedule R attached to each Form 941/941-X on which the third-party payer claimed ERC for the participant;
  • If a return preparer or adviser assisted with the ERC claim, the participant must include the name, address, and phone number of the preparer(s) and advisor(s) and a description of services provided by the preparer(s) or advisor(s).

The amount to be repaid will be calculated on Form 15434 and must be repaid using the Electronic Federal Tax Payment System (EFTPS).7 Each tax period is repaid separately. Taxpayers who cannot make a full repayment may be considered for an installment agreement pending IRS approval.

Final Thoughts

Although the Service has consistently stated that it would continue to process ERC-related refund claims that were filed prior to the processing moratorium announced on September 14—the IRS estimated a backlog of approximately 600,000 returns at that time—the backlog has grown to 1,057,000 Forms 941-X as of December 9.  Some practitioners are concerned for the business owners who have been waiting months upon months for their returns to either be reviewed and/or processed and believe this additional three-month ERC-VDP could further delay any refunds from being issued.

Frost Law attorneys have years of experience in tax controversy matters and ERC eligibility and overall compliance. If you need assistance in determining your eligibility for the ERC Voluntary Disclosure Program, ERC Withdrawal Program, an ERC audit, or evaluating your ERC claim, don't hesitate to reach out to us at (410) 497-5947 or schedule a confidential consultation with our team of expert tax attorneys.

Footnotes

  1. Announcement 2024-3 (released December 21, 2023).
  2. Id. at 1.
  3. Id. at 2.
  4. Id. at 2-3
  5. Id. at 5.
  6. Id. at 3-4.
  7. Id.
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IRS Announces Voluntary Disclosure Program for ERC Claims

Published on
December 22, 2023
Photograph of IRS office headquarters sign in Washington DC with building address and symbolizing the ERC voluntary disclosure announcement
Authors
Heather Posey
Enrolled Agent
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The Internal Revenue Service (the “IRS” or the “Service”) has finally announced details related to its previously teased and highly-anticipated Employee Retention Credit Voluntary Disclosure Program (“ERC-VDP” or the “Program”).  The ERC-VDP is in effect from December 21, 2023, until 11:59 p.m. local time on March 22, 2024,1 and allows employers who made improper ERC-related refund claims to repay the erroneous refund and potentially avoid repaying statutory interest and penalties.  Specifically, the employer is permitted to retain 20 percent of the claimed ERC refund and must repay only 80 percent of the credit.2 Additionally, if the employer repays the ERC in full before executing the mandatory closing agreement, no interest or penalties will be assessed.

ERC-VDP may be ideal for employers who may have made errors while navigating the complexities of ERC, such as large employers who did not consider complicated aggregation rules or who had more than 100 full-time employees in 2019 (for 2020 quarters) or more than 500 full-time employees in 2019 (for 2021 quarters). The Program may also be beneficial for employers who miscalculated their gross revenue or mistakenly used accrual basis accounting instead of cash basis, or vice versa. Additionally, ERC-VDP could be optimal for employers who claimed ERC for all quarters but where governmental orders may have been lifted by a certain date and the employer is potentially not eligible for later quarters (e.g., refund claims made on Q3 2021 returns).

Have Questions? Call Our Team Today.

Who is Eligible for the ERC-VDP?

Employers that claimed ERC and received a credit or refund are eligible to participate in the Program subject to four requirements: 3

  1. The participant is not under criminal investigation and has not been notified that the IRS intends to commence a criminal investigation;
  2. The Service has not received information from a third-party of the participant’s noncompliance, nor has the IRS acquired information directly related to the noncompliance from an enforcement action;
  3. The participant is not currently under an employment tax audit by the IRS for any tax period for which the employer is applying for ERC-VDP; and
  4. The participant has not previously received a notice and demand for repayment of all or part of the claimed ERC.

What Are the Terms of the ERC-VDP? 4

  1. The participant is not eligible for, or entitled to, any ERC for the tax period(s) at issue.
  2. The participant will repay 80 percent of the claimed ERC, including both the refundable and non-refundable portions of the credit.
  3. The participant will not be required to repay any overpayment interest received in conjunction with the credit, and if the participant makes full payment of 80 percent of the claimed ERC prior to executing the mandatory closing agreement, the Service will not assess underpayment interest on the repaid amount. If the taxpayer requests an installment agreement in lieu of full payment, interest may apply from the agreement date.
  4. Participants are not required to reduce the wage expense deducted on the original income tax return with respect to any previously-claimed ERC. If the taxpayer had not previously reduced the wage expense by the amount of ERC received, either on an original or amended tax return, no amendment is necessary. If the taxpayer had previously reduced the wage expense, they need not reduce the wage expense by any of the claimed ERC if they file an amended return to adjust the previous reduction to wage expenses. Additionally, the amount of ERC able to be retained (20 percent) is not considered income to the taxpayer.
  5. If a return preparer or advisor assisted or advised the participant with any portion of the ERC, the participant must provide the name, address, and phone number of the preparer(s) or advisor(s).
  6. The IRS will not assert civil penalties relating to the underpayment of employment tax attributable to ERC against a participant that remits full payment of 80 percent of the claimed ERC prior to executing the closing agreement.
  7. The participant must execute a closing agreement, which is an agreement mailed to the participant by the IRS. The agreement must be signed and returned within 10 days of the date of mailing by the Service.5

How Do You Apply for the ERC-VDP? 6

Participants must complete and submit Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, electronically using the IRS’s Document Upload Tool.

This form, which is signed under penalties of perjury, must include the following items:

  • The taxpayer’s name, taxpayer identification number, current address, and phone number. Taxpayers who are being represented by a tax practitioner regarding the ERC-VDP must also provide a completed Form 2848, Power of Attorney and Declaration of Representative;
  • The tax period(s) for which ERC was claimed, the form on which it was claimed, and the full amount of ERC claimed (including both the refundable and non-refundable amounts);
  • If the tax period(s) for which ERC was claimed include any tax period in 2020, a completed and signed Form SS-10, Consent to Extend the Time to Assess Employment Taxes, must be submitted with Form 15434;
  • If ERC was claimed by a third-party payer on behalf of the participant, such as with a Professional Employer Organization (PEO), the third-party payer must attach a copy of the relevant pages of the Schedule R attached to each Form 941/941-X on which the third-party payer claimed ERC for the participant;
  • If a return preparer or adviser assisted with the ERC claim, the participant must include the name, address, and phone number of the preparer(s) and advisor(s) and a description of services provided by the preparer(s) or advisor(s).

The amount to be repaid will be calculated on Form 15434 and must be repaid using the Electronic Federal Tax Payment System (EFTPS).7 Each tax period is repaid separately. Taxpayers who cannot make a full repayment may be considered for an installment agreement pending IRS approval.

Final Thoughts

Although the Service has consistently stated that it would continue to process ERC-related refund claims that were filed prior to the processing moratorium announced on September 14—the IRS estimated a backlog of approximately 600,000 returns at that time—the backlog has grown to 1,057,000 Forms 941-X as of December 9.  Some practitioners are concerned for the business owners who have been waiting months upon months for their returns to either be reviewed and/or processed and believe this additional three-month ERC-VDP could further delay any refunds from being issued.

Frost Law attorneys have years of experience in tax controversy matters and ERC eligibility and overall compliance. If you need assistance in determining your eligibility for the ERC Voluntary Disclosure Program, ERC Withdrawal Program, an ERC audit, or evaluating your ERC claim, don't hesitate to reach out to us at (410) 497-5947 or schedule a confidential consultation with our team of expert tax attorneys.

Footnotes

  1. Announcement 2024-3 (released December 21, 2023).
  2. Id. at 1.
  3. Id. at 2.
  4. Id. at 2-3
  5. Id. at 5.
  6. Id. at 3-4.
  7. Id.