The IRS is offering a second chance for employers to give back funds received from improper Employee Retention Credit (“ERC”) claims. What’s more is that the IRS is offering a 15% discount on the amount to be returned, plus a full waiver of civil penalties and interest and no pursuit of an ERC audit. This “second chance” is being offered through the ERC Voluntary Disclosure Program, which is open now through November 22, 2024, per the recent IRS Announcement 2024-30.

In the past few years, the IRS has received an unprecedented amount of ERC claims. By the IRS’s estimation, only 10-20% of the ERC claims show a low risk of being problematic, while 80-90% of the ERC claims show a high or unacceptable level of risk. In light of these findings, the IRS is pursuing thousands of ERC audits, has imposed a moratorium on processing any new ERC claims, and is criminally investigating the worst ERC offenders. On top of all this, the IRS plans to mail out letters to roughly 30,000 taxpayers this fall – in an effort to reverse or recapture previously paid-out ERC claims.

For businesses that don’t neatly fit into the 10-20% of “low risk” ERC claims, the IRS offers a reprieve in the form of its ERC Voluntary Disclosure Program. The program is designed for employers that received ERC funds attributable to any quarter in 2021 and now believe that they did not qualify for the ERC during that period.

Key Program Requirements

To participate in the program, an employer must repay 85% of both the refundable and non-refundable portions of the ERC received for all 2021 claims, and in exchange, the IRS allows the employer to keep the remaining 15% and avoid sizeable penalties, interest, and the prospect of an ERC tax audit. The employer must also disclose the identity of any return preparer or advisor that assisted with its 2021 ERC claim and enter into a formal closing agreement with the IRS. For businesses that are not able to pay back the full 85% amount in one lump sum, an installment agreement with the IRS may be considered.

How Did We Get Here?

For many businesses, the ERC was a life raft in a sea of pandemic-era confusion. Many businesses eagerly claimed the ERC after being told they qualified by a consultant or promoter, who only asked for a 15% commission in return for its assistance with applying for the ERC. However, as ERC criteria became clearer over time, some of these businesses have now realized their consultant might have overstated its promises that the business qualified. For example, many employers applied for the ERC on the basis that their operations were fully or partially suspended due to COVID-related government orders. However, upon taking a closer look at the consultant’s work product, many businesses have found that the consultant only relied on non-binding OSHA and CDC guidance or relied on COVID-related government orders that were in place in 2020, but not in 2021.

Key Considerations Before Participating in the Program

In light of this all-too-common example situation, the program offers welcome relief and the ability to mitigate a potentially sizeable ERC liability. Before proceeding with this program, however, businesses should consult with a trusted tax advisor to think through, for example:

• impact on the employer’s 2021 income tax return related to the deduction of wages;
• state tax impact on returning the funds to the IRS;
• potential criminal exposure; and
• the ability of the employer to enter into an installment agreement with the IRS and what the expected terms of that agreement might be.

What if I Do Nothing?

Employers that choose not to participate in the program remain subject to all of the IRS’s powers to audit, assess, and collect any improper ERCs claimed. The IRS commonly assesses a 20% penalty for negligence or disregard of rules or regulations; and interest is currently being imposed by the IRS at a rate of 8%. Thus, even smaller ERC claims can be exponentially more costly than initially anticipated. The IRS plans to mail up to 30,000 letters to employers this fall reversing or recapturing improperly paid ERC claims. These “clawback” notices potentially represent more than $1 billion in claims from tax year 2021 and some additional, later-filed claims from the 2020 tax year. Employers receiving the recapture letters will be ineligible to participate in the ERC Voluntary Disclosure Program for the calendar quarter the letter covers.

Moreover, the IRS Commissioner recently indicated that the IRS will be consulting with Congress to seek additional help with fighting erroneous ERC claims, including potentially seeking an extended statute of limitations for ERC enforcement efforts.