IRS Holiday Surprise: Voluntary Repayments of Questionable ERCs

Originally Published on 12/28/23

by Prof. Robert Bloink and Prof. William H. Byrnes

When it comes to false employee retention tax credit claims, it’s no secret that IRS enforcement efforts are ongoing and aggressive. Many employers have fallen prey to aggressive schemes and made false ERC claims—without always understanding the full details. This holiday season, the IRS has shown that it is sensitive to these situations. It’s offering a do-over for employers who are now questioning the validity of their employee retention credit claims. Employers who believe they may have filed incorrect ERCs should pay close attention to the qualification rules and the consequences of participating in the voluntary disclosure program as we move into the new year.

ERC Enforcement Efforts: Background

Back in October of 2022, the IRS began warning taxpayers about third parties who claim the business may be entitled to a substantial refund by filing amended payroll tax returns for 2020 and 2021 even if the business owner did not actually qualify for the ERC. According to the IRS, these third parties typically charged a large fee or took a percentage of the tax refund generated by the amended return.

While some business owners did legitimately qualify for a refund, many did not. Similarly, the business owner had to remember that if the business filed an amended return, they were also required to reduce the wage deductions they took on their tax return based on the amount of the ERC that was claimed on the amended return.

About one year later, the IRS announced a withdrawal process for taxpayers who filed employee retention tax credit (ERC) claims that they later found to be erroneous.

Employers can use the withdrawal process if the following things are true: (1) they made the claim on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X), (2) they withdraw the entire amount of the ERC claim, (3) the amended return was filed solely to claim the ERC and (4) the IRS has not paid their claim, or if they have, the taxpayer has not cashed/deposited the IRS' refund check.

Now, the IRS has announced a voluntary compliance program for taxpayers who had already received payment on an employee retention tax credit claim that they believe to be erroneous.

Consequences of Participation in the Voluntary Disclosure Program

Successful participation will resolve all civil issues related to an incorrect ERC claim—allowing taxpayers to avoid penalties, interest and civil litigation (criminal liability is not waived).

The voluntary disclosure program will first settle the ERC claim for purposes of the employer's employment tax obligations via eliminating their ERC eligibility while allowing the employer to retain 20% of the claimed ERC amount. Because the ERC reduces the income tax expense for qualified wages, participation in the disclosure program also resolves the corresponding adjustment for income tax expense.

If the terms are satisfied, the employer must repay 80% of the amount claimed (including refundable and non-refundable portions). The employer will not be responsible for repaying overpayment interest received and will not be charged underpayment interest (if the IRS approves an installment arrangement, interest may be charged).

Importantly he individual will not be deemed to receive taxable income by way of repaying only 80% of the claimed amount (and retaining the remaining 20%).

Individuals who used a tax preparer or consulted an advisor with respect to the incorrect credit must provide their name, address and phone number.

Importantly, individuals who participate in the program must notify the IRS of their participation by submitting Form 15434, “Application for Employee Retention Credit Voluntary Disclosure Program”, on or before 11:59 pm local time on March 22, 2024. Participants must submit Form 15434 and any required documentation electronically via irs.gov/DUT.

Does Your Client Qualify for Voluntary Disclosure and Repayment?

Individuals are entitled to participate in the program if all of the following things are true (1) they are not under criminal investigation and have not been notified by the IRS of a forthcoming criminal investigation, (2) the IRS has not received information from a third party about the employer's noncompliance, (3) the individual is not under employment tax examination for any tax period for which the individual is applying for the program and (4) the individual has not already received a notice and demand for repayment for all or a part of the claimed ERC.

Conclusion

Taxpayers who are questioning the validity of their ERC claims should remember that the IRS may have until as late as April 15, 2027 (for claims filed in the third quarter of 2021) to challenge these ERC claims. However, because clients only have a few short months to elect the disclosure and repayment option, the time to evaluate existing ERC claims is now.

Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.