Employee Retention Credit Voluntary Disclosure Program to Be Reopened: What You Need to Know

On July 26, 2024, the IRS announced that they are in the final stages of reopening the Employee Retention Credit (ERC) Voluntary Disclosure Program.

The ERC is a credit that was available to certain eligible employers against employment taxes. It is generally available for wages paid between March 13, 2020 and the end of 2021. The ERC provided vital help for many businesses to survive through the COVID-19 pandemic. At the same time, due to the size of the potential credits, the IRS asserts that a large portion of ERC claims are invalid because the employers were not eligible or the claims were fraudulent. In order to address what it considers a flood of improperly paid claims, the IRS ordered a stop to the processing of ERC claims last September. As part of these efforts, in December of last year, the IRS introduced the ERC Voluntary Disclosure Program to provide a pathway for employers who received erroneous ERC refunds to repay a portion of the claim received. The Voluntary Disclosure Program ended on March 22, 2024 and there was no indication then when it would be offered again. The Voluntary Disclosure Program was specifically for employers who had already received their ERC refund. The IRS has also issued a special withdrawal process to withdraw claims that have not yet been paid, which is still in effect.

We anticipate that the terms of the second round of the Voluntary Disclosure Program will be similar to the first. Participants in the initial Voluntary Disclosure Program were required to repay only 80% of the ERC received and the remaining 20% was not taxable as income. Furthermore, employers were not required to amend their income tax returns to reduce wage expenses and no penalties and interest on the claimed ERC amount were charged if the payment (claimed ERC minus 20%) was made in full by the time the signed closing agreement was returned to the IRS. These are significant incentives for employers with suspect claims to return any improperly claimed ERC refunds. These terms are significantly better than those required by other voluntary disclosure initiatives recently offered by the IRS for other areas of wide noncompliance.

There were some important caveats to the initial program. The Voluntary Disclosure Program did not provide protection from criminal prosecution related to the ERC claim or preclude the IRS from investigating any associated criminal conduct, such as other COVID-19-related theft or fraud. Participants also were required to disclose the full identity with contact information for any promoter or professional who assisted in filing the ERC claim.

We also anticipate that the second-round offering will have a similarly short window for applications. It is crucial to consult with an attorney to determine whether participating in the ERC Voluntary Disclosure Program is the right choice for your specific situation. There are many factors to consider in determining whether you qualify for the program based on your ERC claim and refund status. If you are not eligible, it important to understand the risks of a potential ERC audit and consider alternatives to participating in the Voluntary Disclosure Program.

The recent IRS announcement is welcome news. It is an opportunity for taxpayers who may have been unaware of the original ERC Voluntary Disclosure Program or hesitant to take action to address their questionable claims on very favorable terms.