Deadline approaching for Employee Retention Credit Voluntary Disclosure Program

The IRS has established a voluntary disclosure program for taxpayers who have received the Employee Retention Credit (ERC) payments but have doubts about their eligibility (see our previous article on the announcement of the ERC Voluntary Disclosure Program). This program is taxpayer-favorable, as it allows eligible participants to settle their potential ERC liability by returning the credit on a discounted basis, without paying interest and penalties. However, taxpayers wishing to take advantage of this program need to act fast due to the program ending on March 22, 2024. The IRS recently stated that they do not expect this program to be extended.

In exchange for receiving relief from liability, the IRS program requires taxpayers to pay back 80% of the ERC amounts received. The discount is an accommodation for the significant contingency fees many employers paid ERC promoter firms for their services. In addition to keeping 20% of the credit, taxpayers can also keep any interest they received on the refund, and avoid underpayment penalties and interest.

In an example scenario, with a hypothetical $1 million claimed by a corporation, a taxpayer entering the program can keep $200,000 of the credit, keep the interest and avoid paying up to $210,000 of federal income tax that would be due upon filing of the amended corporate return.

While the net tax benefit is less than the full amount of the credit claimed, it does eliminate the possibility of a worst-case scenario outcome for taxpayers who have dubious claims. In the same scenario as outlined above, the corporation may be subject to repaying the full $1 million plus penalties and interest, and due to a potential statute of limitations mismatch, could possibly find itself liable for the income tax. In this worst-case scenario, the partnership could owe approximately $1.4 million, not including any contingency fees, paid to claim the credit.

The voluntary disclosure program requires taxpayers to provide information on who assisted them with their ERC eligibility and claim processing. The IRS will require participants to sign a closing agreement to memorialize the disclosure, and while an installment agreement may technically be an option, taxpayers should be prepared to make full payment at the time the closing agreement is signed.

The existence of the voluntary disclosure program has not changed the timetable for existing unpaid ERC claims. The IRS imposed a moratorium on processing new ERC claims in September 2023 and significantly increased scrutiny of existing claims (see our previous tax alert