IRS Announces New ERC Voluntary Disclosure Program 2.0

By Christopher Migliaccio, JD, Partner

The IRS announced on August 15 the reopening of its Voluntary Disclosure Program for taxpayers who now believe they have received the Employee Retention Credit (ERC) erroneously. This follows the IRS’ recent statements about its progress in reviewing pending ERC claims, the reopening of processing some claims from after the moratorium and continued focus on pursuing ERC promoters through legal action to combat fraud in the ERC program.  

The Voluntary Disclosure Program allows employers who have received ERC funds erroneously to apply for the opportunity to pay back 85 percent of monies received and avoid penalties and interest – as long as the taxpayer provides information about the ERC promoter with which they worked. The first ERC Voluntary Disclosure Program closed in March, and the reopening should be welcome news to businesses that have come to realize their ERC claims were erroneous. The program will be available through November 22, 2024. Read on for more details about the program.

What Are the Terms of the ERC Voluntary Disclosure Program?

The terms of the second ERC Voluntary Disclosure Program are very similar to those of the first one. Employers seeking to use the ERC Voluntary Disclosure Program to return ERC credits received must:

• Apply to the program using Form 15434, Application for Employee Retention Credit (ERC) Voluntary Disclosure Program.
  
  
• Cooperate with the IRS, such as for any requests for more information.
  
  
• Voluntarily pay back the entire ERC received (not including interest), minus 15 percent.
  
  
• Sign a closing agreement.

The IRS is only requiring 85 percent repayment on the assumption that many applicants will have paid contingent fees of 15 percent or more to the ERC promoters with whom they worked. The program application requires the employer to provide information about the ERC promoter.

PKF O’Connor Davies Observation: The 85 percent repayment term is less favorable to taxpayers than the 80 percent required in the original program, following an IRS trend of offering the best terms in the first round of Voluntary Disclosure Programs.

This round of the ERC Voluntary Disclosure Program is only available for quarters in the year 2021; quarters in 2020 are not eligible.

PKF O’Connor Davies Observation: This continues an IRS focus on 2021 tax periods, which has included a round of disallowance letters focused on the third quarter of 2021. The terms of the ERC often led to significantly larger credits in the 2021 quarters, at a time when claims for business shut down by a government order were losing strength, so the IRS likely feels the most value will be found in going after 2021 claims.

If the employer cannot initially repay the entire amount of the credit, the IRS has indicated installment plans will be available, but interest may be charged from the agreement date under this scenario.

Who Can Use the Voluntary Disclosure Program?

An employer can use the ERC Voluntary Disclosure Program if all of the following apply:

• The employer hasn’t already applied to the first ERC Voluntary Disclosure Program for the same tax periods.
  
  
• Their ERC claim has been paid as a refund and deposited (or used as a credit on employment taxes).
  • PKF O’Connor Davies Observation: Taxpayers who have not been paid on their ERC claim may use the ERC Withdrawal Program.
    
    
• They are entitled to no ERC for the period applied.
  • PKF O’Connor Davies Observation: The Voluntary Disclosure Program applies quarterly – so an employer can withdraw one or more quarters and leave credits for other quarters intact. However, if the employer needs to reduce credit for a quarter (i.e., it claimed $100,000 in credit but now believes it was entitled to $60,000), the employer must file an amended tax return and cannot use the Voluntary Disclosure Program for that quarter.
    
    
• They’re not under ERC audit by the IRS.
  
  
• The IRS has not notified them of full disallowance of the credit.
  
  
• They have not already reversed their ERC to $0 via an amended payroll tax return.
  
  
• The IRS doesn’t have information from a third party alerting it to the employer’s ERC noncompliance.
  
  
• The IRS doesn’t have information directly related to the employer’s ERC noncompliance from an enforcement action.

Taxpayers who use a group payroll company for which more than one employer is represented on a single payroll tax return, such as a professional employer organization (PEO), will need to work with their payroll company to participate in the Voluntary Disclosure Program.

Takeaways

Given the limited time frame that the program will be available (through November 22, 2024) and the favorable terms, employers with doubts about their ERC eligibility should perform a review, as the program could provide significant savings in penalties and interest. If you did not work with a trusted tax professional, now is an excellent time to review your eligibility and credit calculation with a trusted tax advisor. That advisor could represent you in the voluntary disclosure process if necessary.

It’s important to note that the recent IRS activity around the ERC should not concern those with legitimate claims who have worked with a trusted tax professional and documented their qualification.

Read the full IRS announcement here.

Contact Us

PKF O’Connor Davies has helped hundreds of companies across a number of industries determine their ERC qualification, calculate their credit and help them file amended payroll tax returns.

If you have questions about the employee retention credit, contact your Client Service Partner or:

Christopher Migliaccio
Partner
ERC Services Leader
cmigliaccio@pkfod.com