Voluntary Disclosure Program for Employers with ERC Claims
Recently, the IRS now announced a voluntary disclosure program to allow employers with erroneous employee retention credit (ERC) claims to avoid potential penalties, interest and civil litigation. The 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. Taxpayers are entitled to participate in the program if (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. If the terms are satisfied, the employer must repay 80% of the amount claimed (including refundable and non-refundable portions) and will not be responsible for repaying overpayment interest received, and will not be charged underpayment interest.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the 80% ERC repayment option.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Bloink
Byrnes
Their Reasons:
Bloink: Many taxpayers fell prey to too-good-to-be-true schemes through little to no fault of their own. These schemes were widespread enough that the IRS saw fit to give taxpayers the opportunity to re-evaluate their situations and correct the mistakes. This program only resolves matters in the civil context—those employers who intentionally misrepresented the facts and received inaccurate amounts are not shielded from criminal investigations and potential punishments associated with those results.
Byrnes: The ERC schemes were widespread enough that the IRS issued warning after warning after warning. Now, taxpayers who benefitted from erroneous ERC claims are simply permitted to repay a portion of those amounts without any type of penalty? And are entitled to keep 20% of the erroneously claimed credit without recognizing any taxable income? That seems like a windfall that doesn't make much sense to me.
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Bloink: This voluntary disclosure and correction system will be much more efficient than wasting enormous amounts of IRS resources on reviewing every single ERC claim and pursuing the funds from taxpayers across the country. This will be an effective way to recoup vast amounts without expending the resources to pursue taxpayers who filed incorrect claims through little or no fault of their own.
Byrnes: At minimum, taxpayers who filed false ERC claims should be required to repay the entire amount of the credit that they received. The IRS would also be justified in assessing penalties and interest for inaccurately filed returns.
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Bloink: We’re talking about a tax credit that was hastily implemented during the height of the COVID-19 pandemic. Taxpayers did not always have the full and beneficial guidance that they needed to accurately interpret the availability of the credit—and unfortunately, schemers and scammers did find ways to take advantage of that. Providing relief now recognizes these facts and gives taxpayers a realistic and reasonable way to make things right without risk of extreme penalties that, under the circumstances, are arguably unfair.
Byrnes: I don’t see why taxpayers are permitted to keep 20% of the claimed credit. Of course, the rationale would be that many taxpayers actually paid these scammers a portion of the credit in exchange for their faulty advice. Protecting every taxpayer from the consequences of their bad choices and ignorance of repeated IRS warnings does not seem fair to those taxpayers who took the time to get things right.