Tax Facts
IRS Gives Second Chance for Voluntary Disclosure on Questionable ERC Claims
by Prof. Robert Bloink and Prof. William H. Byrnes
The IRS is continuing its aggressive enforcement initiative with respect to COVID-era employee retention tax credits (the ERC). The IRS announced last week that it will be reopening its voluntary disclosure program (VDP) for employee retention credit claims. This second round VDP will be available through November 22, 2024. While the revised VDP is not quite as generous as the initial program, employers who have claimed the ERC should pay close attention to this new opportunity. The IRS announcement shows just how seriously it takes erroneous or incorrect ERC claims. In the past weeks, the IRS has announced the results of its ongoing enforcement efforts—and also announced that it plans to mail thousands of additional letters to taxpayers with questionable ERC claims in the coming months. When in doubt, employers should carefully review their available options for disclosure or withdrawal to avoid a potentially detailed IRS review.
What is the IRS VDP?
The revamped VDP gives businesses the opportunity to correct improper ERC payments for the 2021 tax year and receive a 15% discount, avoiding future audits, penalties and interest. The first-round VDP that closed in March offered a 20% discount.
Employers are entitled to participate in the VDP 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 employer is not under employment tax examination for any tax period for which they are applying for the program and (4) the employer has not already received a notice and demand for repayment for all or a part of the claimed ERC.
The IRS simultaneously announced that it plans to send up to 30,000 new letters to business owners to reverse or recapture improper ERC payments. Additional mailings for questionable claims will be made this fall.
The IRS is stressing the fact that businesses with claims that show identified warning signs should review their eligibility and consult a trusted tax professional to determine whether their claim was proper.
ERC Warning Signs Identified by the IRS
The IRS has identified several key warning signs that it will be watching for when reviewing employee retention credit claims.
First, the IRS is watching for claims from essential businesses that could operate during the pandemic, so did not have the required decline in gross receipts. Businesses who cannot provide proof of how a government order fully or partially suspended their operations will be subject to close scrutiny. Businesses who are claiming the ERC with respect to wages paid to family members will be subject to careful review to determine the legitimacy of the employment relationship.
The IRS is also watching for businesses trying to "double dip," claiming both the ERC and paycheck protection program loan forgiveness with respect to the same wages. The IRS is also carefully reviewing claims from large employers who are subject to special rules for the ERC.
The IRS previously identified as red flags situations where an employer claims the ERC for (1) too many quarters, (2) too many employees or (3) all employee wages (it's nearly impossible for a business to qualify for all quarters and all wages).
Employers should also look carefully at claims involving government shutdown orders or supply chain issues. A qualifying government order must suspend the business' operations and be COVID-related (and an order, not a recommendation). Supply chain disruptions themselves are not sufficient to qualify, so are another warning sign. Businesses should also check the amount they claim--the ERC is only available for wages paid during the period operations were suspended, not necessarily for the entire quarter. The business can only qualify if it paid wages to employees during the period in question.
Employers should also be extremely skeptical in situations where they claimed the ERC based on advice from a promotor claiming that there was nothing to lose.
IRS ERC Withdrawal Process
The ERC claim withdrawal option also remains available. Over 7,300 entities have withdrawn about $677 million in ERC claims to date.
Employers can use the withdrawal process if (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 claim, and (3) the IRS has not paid their claim, or they have not cashed/deposited the IRS' refund check.
Conclusion
Once a business owner receives an IRS letter about their ERC claim, they become ineligible to participate in the VDP for the calendar quarter that the letter covers. Once the IRS identifies the erroneous or excessive ERC, it will reclaim that payment through normal assessment and collection procedures.
Employers who are even slightly concerned about their ERC claim should carefully examine their circumstances to determine whether the VDP or withdrawal process can help them avoid future IRS intervention.
Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.
The IRS is continuing its aggressive enforcement initiative with respect to COVID-era employee retention tax credits (the ERC). The IRS announced last week that it will be reopening its voluntary disclosure program (VDP) for employee retention credit claims. This second round VDP will be available through November 22, 2024. While the revised VDP is not quite as generous as the initial program, employers who have claimed the ERC should pay close attention to this new opportunity. The IRS announcement shows just how seriously it takes erroneous or incorrect ERC claims. In the past weeks, the IRS has announced the results of its ongoing enforcement efforts—and also announced that it plans to mail thousands of additional letters to taxpayers with questionable ERC claims in the coming months. When in doubt, employers should carefully review their available options for disclosure or withdrawal to avoid a potentially detailed IRS review.
What is the IRS VDP?
The revamped VDP gives businesses the opportunity to correct improper ERC payments for the 2021 tax year and receive a 15% discount, avoiding future audits, penalties and interest. The first-round VDP that closed in March offered a 20% discount.
Employers are entitled to participate in the VDP 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 employer is not under employment tax examination for any tax period for which they are applying for the program and (4) the employer has not already received a notice and demand for repayment for all or a part of the claimed ERC.
The IRS simultaneously announced that it plans to send up to 30,000 new letters to business owners to reverse or recapture improper ERC payments. Additional mailings for questionable claims will be made this fall.
The IRS is stressing the fact that businesses with claims that show identified warning signs should review their eligibility and consult a trusted tax professional to determine whether their claim was proper.
ERC Warning Signs Identified by the IRS
The IRS has identified several key warning signs that it will be watching for when reviewing employee retention credit claims.
First, the IRS is watching for claims from essential businesses that could operate during the pandemic, so did not have the required decline in gross receipts. Businesses who cannot provide proof of how a government order fully or partially suspended their operations will be subject to close scrutiny. Businesses who are claiming the ERC with respect to wages paid to family members will be subject to careful review to determine the legitimacy of the employment relationship.
The IRS is also watching for businesses trying to "double dip," claiming both the ERC and paycheck protection program loan forgiveness with respect to the same wages. The IRS is also carefully reviewing claims from large employers who are subject to special rules for the ERC.
The IRS previously identified as red flags situations where an employer claims the ERC for (1) too many quarters, (2) too many employees or (3) all employee wages (it's nearly impossible for a business to qualify for all quarters and all wages).
Employers should also look carefully at claims involving government shutdown orders or supply chain issues. A qualifying government order must suspend the business' operations and be COVID-related (and an order, not a recommendation). Supply chain disruptions themselves are not sufficient to qualify, so are another warning sign. Businesses should also check the amount they claim--the ERC is only available for wages paid during the period operations were suspended, not necessarily for the entire quarter. The business can only qualify if it paid wages to employees during the period in question.
Employers should also be extremely skeptical in situations where they claimed the ERC based on advice from a promotor claiming that there was nothing to lose.
IRS ERC Withdrawal Process
The ERC claim withdrawal option also remains available. Over 7,300 entities have withdrawn about $677 million in ERC claims to date.
Employers can use the withdrawal process if (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 claim, and (3) the IRS has not paid their claim, or they have not cashed/deposited the IRS' refund check.
Conclusion
Once a business owner receives an IRS letter about their ERC claim, they become ineligible to participate in the VDP for the calendar quarter that the letter covers. Once the IRS identifies the erroneous or excessive ERC, it will reclaim that payment through normal assessment and collection procedures.
Employers who are even slightly concerned about their ERC claim should carefully examine their circumstances to determine whether the VDP or withdrawal process can help them avoid future IRS intervention.
Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.
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