IRS Launches Voluntary Disclosure Program for Questionable Employee Retention Credit Claims
The IRS recently introduced its Voluntary Disclosure Program (VDP) for employers who have received dubious Employee Retention Credit (ERC) money. Developed over several months, the VDP is a key component of the IRS's broader strategy to address misleading marketing practices related to the ERC, which led some employers to file erroneous claims. IRS Commissioner Danny Werfel emphasized the significance of the VDP, providing a necessary option for employers who unwittingly applied for ERC and now seek to rectify their mistakes.
As part of this initiative, the IRS is sending up to 20,000 letters with proposed tax adjustments to employers who claimed erroneous or excessive credits. These adjustments aim to recapture mistakenly claimed ERCs for tax year 2020, with continued efforts for tax year 2021.
The IRS is also encouraging employers with pending ERC claims to consider a separate withdrawal program, permitting the removal of such claims without incurring interest or penalties. The agency has already received over $100 million in withdrawals, underscoring its commitment to intensifying audits and criminal investigations in this area.
Qualifying for the VDP
An employer can apply for the VDP for each tax period in which:
- Its ERC claim was processed and paid as a refund that has been cashed or deposited, or paid in the form of a credit applied to that or another tax period
- It believes it wasn’t entitled to the ERC
- It isn’t under IRS audit for employment taxes
- It isn’t under IRS criminal investigation
- The IRS hasn’t reversed, or notified the employer of its intent to reverse, the ERC to zero (for example, with a letter or notice disallowing the credit)
If a third-party payer filed an employment tax return that reported an employer’s ERC-related wages and credits, the employer can participate in the VDP only through the third-party payer. It’ll be rejected if it applies with its own employer identification number. Additional qualifications and program details can be found in Announcement 2024-3.
How to Apply
Employers interested in the program must file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program. If accepted into the program, participants will repay only 80% of the credited amount, with no obligation to repay any interest received on an ERC refund or amend their income tax returns to reduce wage expenses. This repayment amount was chosen because many ERC promoters charged fees, resulting in recipients not receiving the full amount. The IRS will consider installment agreements on a case-by-case basis for those unable to meet the 80% repayment requirement.
Employers won’t be subject to penalties or underpayment interest if the 80% repayment is made before the signed closing agreement is returned to the IRS. The 20% reduction won’t be treated as taxable income, and the IRS won’t audit the ERC on employment tax returns for the tax periods covered by the closing agreement.
The IRS has provided a set of frequently asked questions addressing the terms of the ERC program to help employers with the VDP. If you have further questions, Doeren Mayhew’s business tax pros are here to assist – we know the way.