Executive Summary
On Dec. 21, 2023, the IRS announced the launch of the highly-anticipated employee retention credit (ERC) voluntary disclosure program (VDP) and an accompanying series of frequently asked questions. The VDP is the latest effort by the IRS to combat aggressive marketing and fraudulent activity surrounding the credit, after previously announcing a moratorium on processing new credits (Sept. 18, 2023 Tax Alert), launching a separate program that allows taxpayers to return uncashed checks for ERCs claimed (Nov. 06, 2023 Tax Alert), and issuing 20,000 claim denial letters to taxpayers earlier in December. Eligible taxpayers have until March 22, 2024 to apply to the VDP, and those accepted will repay 80% of the credits they claimed without interest or penalties in exchange for providing information about any advisors or tax preparers who advised them in pursuing the ERC.
Key Takeaways
- Any taxpayer who has received the ERC is eligible to participate (including those who have cashed or deposited their refund), so long as:
- They are not under criminal investigation, and have not been notified that the IRS intends to begin a criminal investigation,
- The IRS has not been alerted to the taxpayer’s noncompliance,
- The taxpayer is not under employment tax audit for any tax period for which they are applying for the VDP, and
- The taxpayer has not received a notice and demand for repayment of the ERC.
- The deadline to apply to the VDP is March 22, 2024. Accepted applicants will not pay interest and penalties if they can repay 80% of the credits claimed in full. Taxpayers who cannot repay in full can enter into an installment agreement, though interest and penalties may apply.
- The IRS is discounting the repayment amount by 20% to account for the fact that many applicants may have utilized the services of a credit mill firm, and thus had to pay a percentage fee for the credits claimed.
- In exchange for participating in the program, taxpayers must provide the name, address, and telephone number of any tax advisor or preparer that assisted them with the claim and describe the services they provided.
- Participating in the settlement eliminates a taxpayer’s eligibility for the ERC, thus, if they had not previously filed an amended return or AAR to reduce the deduction for wages on which the credit was claimed, they do not need to do so. The participant will not have income associated with the 20% of the ERC they are allowed to keep.
- Employers who worked with a promoter to claim the credit or otherwise claimed the ERC on shaky grounds for eligibility should be strongly encouraged to consider participating in the VDP. In a related press call, IRS Commissioner Danny Werfel stressed taxpayers who claimed the credit erroneously “will not get a better deal later”. As evidenced by information regarding credit mill firms being exchanged for admittance to the program, the IRS is far from done going after fraudulently claimed credits.
How to Proceed
Given the opportunity to repay the credit at a 20% discount, the pervasive nature of the ERC promoter firms’ marketing, and the many warnings issued by the IRS against pursuing the credit aggressively, it is possible many taxpayers will pursue the VDP. Baker Tilly can assist with the analysis of if the program is the right fit for an organization. If the voluntary disclosure program is the best course of action Baker Tilly has an ERC team that can assist with preparing and submitting the voluntary disclosure information and working with the IRS to receive a closing letter.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
