On December 21, 2023, the Internal Revenue Service ("IRS") announced a much anticipated, and soon to be short lived, voluntary disclosure program for employers who believe they may have erroneously claimed a pandemic-era Employee Retention Credit ("ERC") and wish to reverse their claim in exchange for penalty and interest relief.
Congress initially created the ERC as part of the CARES Act to incentivize employers to keep employees on their payroll during the COVID-19 pandemic. The ERC was modeled on similar credits that had previously been offered to businesses affected by natural disasters in 2005, 2017, and 2018. Taxpayers could qualify for a refundable tax credit on their employment tax returns if government orders fully or partially suspended their operations, they suffered a significant statutorily defined decline in gross receipts, or they were a recovery startup business during the relevant eligibility periods.
Many employers benefited from this tax relief, but the IRS now contends that some companies applied for the credit based on marginal or even fraudulent grounds. Overall, employers have filed more than 3.6 million ERC claims resulting in government tax credit refunds in excess of $230 billion.
In March 2023, the IRS added the aggressive marketing of the ERC to ineligible employers to its "Dirty Dozen" list of tax scams. In September 2023, the IRS halted all ERC refund requests and allowed employers to withdraw pending claims if they no longer believed they qualified. The IRS also announced that it had referred thousands of ERC claims for audit and that hundreds of criminal cases were being investigated. This voluntary disclosure program marks the next step in the IRS's efforts to ensure only employers entitled to the credits actually retain them. With this backdrop, the IRS is providing employers who are not currently under investigation a limited window to make a voluntary disclosure if they do not believe they properly qualified for the credit and would like to participate in a structured settlement.
Under the terms of the program, taxpayers have until March 22, 2024, to electronically submit Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, and all supporting documentation. Employers submitting the form must identify the periods and amounts in which the credit was claimed and provide information about any tax return preparers or advisors who assisted with the claim. The form is signed under penalties of perjury. Employers must agree that they were not eligible for any ERC during the relevant period and will be required to repay 80% of the claimed ERC. In exchange, the employer will not be assessed penalties on any underpayment; will not be required to reduce previously claimed wage expenses; and, if full payment is made prior to the signing of a closing agreement, will not owe interest. Participation in the program will not confer any immunity from criminal liability. Employers who want to make use of the program but do not have sufficient funds to repay 80% of the claimed ERC may be eligible for an installment payment plan but will have to pay interest on the outstanding amount owed. Such employers must also submit Form 433-B, Collection Information Statement for Businesses. Of note, claims that were made by a third-party payer on behalf of the employer are eligible for relief under the voluntary disclosure program, but the application must my submitted by the third-party payer itself.
Whether a business qualified for the ERC was a difficult determination, especially in light of the limited IRS guidance to assist taxpayers. Employers who have questions about whether they properly qualified for the credit and whether a voluntary disclosure is right for them are encouraged to seek advice from an independent tax professional. Similarly, return preparers or advisors who assisted with claims for credit or refund connected to the ERC, that they have reason to believe may be subject to this voluntary disclosure program, should seek advice on any exposure they may have to future IRS enforcement actions.
This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.
