As previously indicated in the IRS moratorium announcement in September, recipients of ineligible Employee Retention Credits (ERCs) and resulting refunds have now been provided an opportunity to avoid potential penalties, interest, and litigation by participating in the Voluntary Disclosure Program as provided by the IRS in Announcement 2024-3. The announcement details participant eligibility requirements, terms of the program, and the procedures to file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, which must be completed on or before March 22, 2024. The IRS also issued news release IR-2023-247 and FAQs providing additional information.
IRS Commissioner Danny Werfel stated, “The disclosure program provides a much-needed option for employers who were pulled into these claims and now realize they shouldn’t have applied. From discussions we have had with taxpayers and tax professionals around the country, we understand that there are many employers eager to correct their error, but who remain concerned about their ability to pay back the portion of the credit that has been lost to the promoter that brought them into this mess. This new option, with an opportunity to get right with a lower financial cost, provides the relief these taxpayers requested. The new initiative will also help with our ongoing efforts to gather information on promoters who created this situation by aggressively pushing people to apply for the credit.”
According to the announcement, claimants of the ERC that have received the credit or refund are eligible to participate in the program, including participants that utilize third-party payers, e.g., professional employer organizations. Eligible participants cannot be under criminal investigation or under IRS employment tax examination, the IRS cannot have already received notice from a third-party source of the participant’s noncompliance, and the participant cannot have already received notice from the IRS for repayment of the claimed ERC. Third-party payers that claimed the credit under their own Employer Identification Number may submit the form on the participant’s behalf.
Participants of the program will no longer be entitled to any ERC and must remit back 80% of the claimed credit. The news release explains, “The IRS selected an 80% repayment because many of the ERC promoters charged a percentage fee that they collected at the time of payment or in advance of the payment, and the recipients never received the full amount.” No income needs to be recognized related to the 20% of the claimed credit not repaid and participants do not need to repay any overpayment interest that may have been paid to them as part of the original refund payment.
Remittance of payment must be made utilizing the Electronic Federal Tax Payment System (EFTPS) by the date of the closing agreement (explained later), and payments should be separated for each tax period so they can be accurately credited. Payments in full will not be subject to underpayment penalties. If full payment is not feasible, an installment agreement may be requested, subject to penalties and interest. Consequently, the IRS encourages those who cannot pay in full to consider obtaining a loan (at potentially more favorable rates) rather than entering into an installment agreement. Since the program disentitles the participant to the ERC, wage expense need not be reduced for the tax year the credit was claimed.
Eligible participants must first make the election to participate by filing online Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program. A practitioner representing the participant must include Form 2848, Power of Attorney and Declaration of Representative. For any ERC claimed in tax periods ending in 2020, participants must include the ERC Voluntary Disclosure Program Form SS-10, Consent to Extend the Time to Assess Employment Taxes. Notably, participants will be required to provide the name, address, phone number, and a description of services provided by a preparer or advisor who assisted or advised with claiming the ineligible ERC.
After Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program is filed with all required information, the IRS will mail a closing agreement which then must be executed by the participant within 10 days. Extensions requested during the 10-day period may be granted for good cause. Denials of participants may not be appealed and acceptance into the program does not release the participant from IRS investigations into criminal conduct or prosecution.
The IRS had previously provided procedures for employers who filed ineligible ERC claims who had not yet received refunds to make a request to withdraw their claims. These procedures can be found here. Employers have at least until the end of the year to make this request.
If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.