Nothing Lasts Forever: IRS Employee Retention Credit Voluntary Disclosure Program Ends Soon

Nothing is forever—including tax amnesty. The IRS’ second employee retention credit (ERC) voluntary disclosure program for businesses who want to pay back the money they received after filing ERC claims in error is ending. The program will run through November 22, 2024.

First Crack Of Disclosure

The current opportunity is the second iteration of the IRS’ ERC program. In the program’s first iteration—which ended on March 22, 2024—businesses who were accepted into the program had to pay just 80% of the credit received. In addition, the IRS did not charge interest or penalties on any credits you repay. And, if the IRS had paid interest on an ERC refund claim, businesses need not repay that interest.

Current Version Benefits

The second round of the program only applies to tax periods in 2021—you can’t use this version of the voluntary disclosure program to repay ERC money from 2020. Specifically, the only employment tax returns that taxpayers can resolve in the second version of the program are for tax periods ending March 31, 2021, June 30, 2021, September 30, 2021, and December 31, 2021.

If accepted into the new version of the program, you must repay 85% of the credit received. If you cannot repay the required 85% of the credit when signing your closing agreement, you may be considered for an installment agreement (that will happen on a case-by-case basis).

The IRS will not charge interest or penalties on any credits you repay in a timely manner. However, if you can’t repay the credit when you sign your closing agreement, you must pay penalties and interest in connection with an alternative payment arrangement—including an installment agreement.

And as before, if the IRS paid interest on your ERC refund claim, you won’t need to repay that interest.

Importantly, you will not be subject to an employment tax audit for ERC claims resolved through the program.

(The promoters are not being let off the hook. As in the first version of the program, you must provide the IRS with the names, addresses, and telephone numbers of any advisors or tax preparers who advised or assisted with your claim, as well as details about the services provided.)

IRS Red Flags

When considering whether a claim might be appropriate, Chris Ferguson, a tax partner at Kostelanetz, LLP, in New York City, points to a list of a dozen red flags that the IRS has identified to suggest that a claim may be questionable:

1. Claiming the ERC for too many quarters;

1. Claiming the ERC based on non-qualifying government orders;
2. Claiming the ERC for too many employees or improperly calculating qualified wages;
3. Claiming the ERC based on supply chain issues;
4. Claiming the ERC for too much of a tax period;
5. Claiming the ERC when the business didn’t exist or pay wages during the eligibility period;
6. Working with a promoter who suggests you can improperly claim or calculate the ERC;
7. Claiming the ERC without evidence of a decline in gross receipts;
8. Claiming the ERC without being able to support how a government order fully or partially suspended business operations;
9. Reporting majority owners’ and family members’ wages as qualified wages;
10. Claiming the ERC based on wages used for Paycheck Protection Program (PPP) loan forgiveness; and
11. Claiming the ERC for employees who were not providing services (large employers).

The items on the list aren’t equal, explains Ferguson, noting that some are more egregious than others. Some—like double-dipping with PPP funds—are black and white, while others may be more gray.

Eligible Participants

If you received the ERC for a tax period in 2021 (remember, this version of the program doesn’t cover 2020) but you’re not entitled to it, you can apply if the following are also true:

• You haven’t already applied to the first ERC voluntary disclosure program for the same tax periods (the IRS is still processing those, and taxpayers should not reapply for the same periods);
• You aren’t under criminal investigation;
• You aren’t under an IRS employment tax examination for the tax period for which you’re applying;
• You haven’t received a Letter 6577-C, Employee Retention Credit (ERC) Recapture, or an IRS notice and demand for repayment of part or all of your ERC claim;
• You haven’t already filed an amended return to eliminate your ERC; and
• The IRS hasn’t received information from a third party or directly from an enforcement action that you are not in compliance.

If you’re not eligible to participate but believe that you may have submitted a questionable claim, Ferguson notes that there are other options, including the ERC withdrawal program. Under the withdrawal option, those who have filed an ERC claim but have not received a refund can withdraw their submission and avoid future repayment, interest, and penalties.

There may be other options, Ferguson says, including the more traditional IRS voluntary disclosure program. That program allows taxpayers with previously undisclosed income to contact the IRS and resolve their tax matters. This option is to resolve civil matters—the longstanding IRS program does not apply to taxpayers whose income is derived from illegal activities. There is no immunity from criminal prosecution with the IRS voluntary disclosure program—and you’ll lose the benefit of the 15% “discount” that you would receive under the ERC voluntary disclosure program.

Ready To Apply

To apply, you must complete Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, available on IRS.gov. Form 15343 must be submitted using the IRS Document Upload Tool.

Some applicants may need additional forms.

Note that if you outsource your payroll to a third party who reports, collects, and pays employment taxes on your behalf using the third party’s Employer Identification Number (EIN), the third party must file Form 15434. You cannot file the form in that case.

Ferguson also recommends that you consult with a professional. While the application is pretty straightforward, sorting out some of the circumstances—this is a facts and circumstances-heavy analysis—may be more complicated. Having someone with experience handling these matters can be helpful—especially when making a misstep can result in financial (and potentially criminal) penalties.

Next Steps

Once you have applied to the program, an IRS employee will contact you to review the application and answer any questions. If you’re approved, the IRS will mail you a closing agreement. Payment is due immediately.

If you cannot pay the amount in full, you can enter into an installment agreement with the IRS to pay over time. However, as noted earlier, penalties and interest will apply, so the IRS encourages those who cannot pay in full to consider obtaining a loan or find other funds to avoid the costs of an installment agreement with the IRS.

And be prepared to wait. Ferguson says that, currently, the IRS is taking some time to process applications (no surprise there).

Lawsuits

With the deadline imminent, not all employers are ready to bite. One reason they might be waiting? Pending litigation.

The IRS routinely cites Notice 2021-20 to deny ERC claims—the Notice provides guidance on ERC qualification. But, Ferguson says, not everyone is convinced that the Notice is proper authority.

In Southern California Emergency Medicine, Inc., v. Daniel Werfel et al., filed in the U.S. District for the Central District of California, Eastern Division, the plaintiff asked the Court to invalidate Notice 2021-20 and stop the IRS from enforcing the guidance or restricting the availability of ERC payments, absent compliance with the Administrative Procedure Act (APA). The plaintiff argues that the Notice was inconsistent with Congressional intent and substantially narrowed the ERC program. The IRS, they say, lacked authority to do that.

The lawsuit, filed at the end of 2023, is still winding through the courts.

Frequently Asked Questions

If you’re not sure whether you qualify, you can review the details of the voluntary disclosure program in IRS Announcement 2024-30 and review eligibility for ERC on the IRS website. The IRS created a checklist to help businesses or other organizations decide if they qualify for the ERC.

The IRS has published some Frequently Asked Questions about the second ERC Voluntary Disclosure Program on its website to help you understand the terms of the program.