On Dec. 21, 2023, the IRS announced the Employee Retention Credit Voluntary Disclosure Program (ERC-VDP), which helps eligible taxpayers pay back the money they had received for erroneously filed Employee Retention Credit (ERC) claims. This recently announced program is the latest step taken by the IRS in addressing the perceived large-scale fraud involved in ERC claims filed by taxpayers with the help of promoters that collected sizable commissions. The program provides taxpayers with the opportunity to keep 20% of the claimed ERC amount (generally corresponding to the portion typically paid to such promoters), provided the application is made by March 22, 2024. The most recent program follows the announcement of a moratorium on processing new ERC claims and increased scrutiny of pending ERC claims, as well as the introduction of withdrawal procedures with respect to ERC claims that were not previously processed. As pointed out in a prior Kramer Levin client alert, the uncertainty concerning ERC claims is highlighted in the context of M&A transactions, and therefore acquirors in M&A transactions should continue to analyze the risks associated with any ERC claims previously filed and explore possible mitigating measures, including eligibility under the ERC-VDP.
Eligibility for the Program
Any taxpayer that claimed the ERC is eligible to participate in the ERC-VDP, provided that (1) the participant is not under criminal investigation and has not been notified that the IRS intends to conduct a criminal investigation; (2) the IRS has not received information relating to the participant’s noncompliance with the requirements of the ERC; (3) the participant is not under an IRS employment tax examination for any tax period(s) to which the ERC-VDP is to apply; and (4) the participant has not previously received notice and demand for repayment of all or part of the ERC.
A participant that claimed the ERC using a third-party payer (e.g., a PEO) that claimed the ERC on an employment tax return using the third-party payer’s employer identification number may participate in the program, but the third-party payer must submit the application on the participant’s behalf.
Terms of the Program
Under the terms of the ERC-VDP, the participant is not eligible for, or entitled to, any ERC and agrees to remit to the Department of the Treasury 80% of the claimed ERC. As long as the participant makes full payment of 80% of the claimed ERC prior to executing the closing agreement, the participant is not required to repay any overpayment interest received and is relieved of civil underpayment penalties related to the claimed ERC. The participant’s ability to keep 20% of the claimed ERC is intended to reflect the fact that in many cases, ERC promoters collected a percentage fee from the taxpayer, and as a result the taxpayers often did not receive the full amount of their credit or refund. The ERC-VDP requires certain disclosures regarding return preparers or advisers who participated in the claim for the ERC.
The ERC-VDP also has income tax implications. First, under the terms of the settlement, a participant has no taxable income with respect to the 20% of the claimed ERC that the participant retains. Second, since the program eliminates a participant’s eligibility for all of the claimed ERC, the participant is not required to reduce wage expense with respect to any of the previously claimed ERC. If a participant had previously reduced wage expense by any of the claimed ERC, they may file an amended income tax return or administrative adjustment request adjusting the previous reduction to wage expense.
Procedures
In order to participate in the ERC-VDP, participants are required to electronically submit Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, by March 22, 2024. The IRS will then prepare a closing agreement, which will be mailed to the participant and must be signed and returned within 10 days of the date of mailing by the IRS. Full payment should be made by the participant by the date the participant executes the closing agreement, though participants unable to remit full payment may be considered for participation in an installment program.
Considerations for M&A Transactions
Acquirors in M&A transactions could potentially benefit from the ERC-VDP if any of their acquired businesses had wrongfully claimed the ERC. The IRS continues to increase its compliance efforts in order to combat ERC fraud, and the ERC-VDP is an opportunity for employers to remove claims for which they should never have applied and to do so at a lower financial cost. If a business had wrongfully applied for the ERC and is audited by the IRS, not only would the business not be able to keep 20% of the claimed amount, but it also might be liable for the imposition of penalties and interest. Given that ERC claims have typically not been subject to extensive due diligence during the M&A process, acquirors could benefit from exploring whether a target is eligible to participate in the ERC-VDP. In a press call announcing the program and encouraging eligible employers to participate, IRS Commissioner Danny Werfel stated, “They will not get a better deal later.”
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