On December 21, 2023, the IRS announced a Voluntary Disclosure Program for the Employee Retention Credit (ERC). This is the latest move by the IRS to address what it considers “dubious ERC claims.” The program presents an opportunity for an employer to repay the ERC claim they received, if they now believe they are no longer eligible for the credit. It allows a qualifying business owner to repay an ERC claim at 80% of what they received and avoid penalties. The IRS issued Announcement 2024-03 detailing this new program.
In providing this relief, 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.”
Employers must apply for the Voluntary Disclosure Program by March 22, 2024. As outlined in IRS Announcement 2024-03, there are certain qualifications to meet when utilizing the program. Businesses that qualify for the program must repay 80% of the ERC claim it received. However, if the IRS paid interest on an employer’s initial ERC refund claim, the employer does not need to repay the interest.
The IRS also stated that a business that already received the credit for a prior tax period, but now believes it doesn’t qualify for the credit, can apply for this program only if all the following are true:
- The employer is not under criminal investigation (and has not been notified that they are under criminal investigation).
- The employer is not under an IRS employment tax examination for the tax period in which they are applying to the Voluntary Disclosure Program.
- The employer has not received an IRS notice and demand for repayment of all or part of the ERC.
- The IRS has not received information from a third-party that the taxpayer is not in compliance or has not acquired information directly related to the taxpayer’s noncompliance from an enforcement action.
Other Considerations. Recipients of the ERC refund that now have second thoughts about their eligibility should closely review the provisions in IRS Announcement 2024-3. A few other factors to consider include:
- IRS disclosure-type programs must be approached with care. While this program offers some favorable ERC settlement terms, if the taxpayer comes forward to register and is not accepted into the program by the IRS, it could put the full 100% of the ERC claim they received at risk. Prior to registering for this program, consider contacting legal counsel to evaluate your situation and the specifics of this program.
- The IRS chose 80% as a repayment factor (and thus, a 20% savings for the taxpayer), as that was the percentage many third-party ERC firms charged as a fee. The 20% reduction is available to the taxpayer, regardless of what fee, if any, a taxpayer paid to a third-party provider. If a taxpayer registers for this program and settles their ERC claim at 80%, they can then decide with legal counsel whether to pursue repayment of any amount initially paid to a third-party provider with their ERC claim.
- If a taxpayer has not yet amended their 2021 and/or 2020 income tax returns, the IRS announcement states that the taxpayer is not required to do so under the IRS Voluntary Disclosure Program if they pay the required 80% of their claim.
- Those interested in signing up for the IRS Voluntary Disclosure Program that meet the conditions should not wait to register.
This Voluntary Disclosure Program is a significant development with the ERC. It’s important to know this now so you can evaluate your situation and apply by the deadline. We will closely monitor ERC updates and its impact on businesses. Please contact your Sikich tax advisor in the meantime with any questions:
About our authors
Jim Brandenburg
Jim Brandenburg, CPA, MST, is a director with extensive experience and knowledge in corporate and partnership tax law, mergers and acquisitions, and tax legislation. His expertise includes working with owners of closely held businesses to identify tax planning opportunities and assist them in implementing these strategies.
Tom Bayer
Tom Bayer, CPA, CExP, is the market lead for the Indianapolis, Indiana region. He has 30 years of experience providing a broad range of accounting, tax and business advisory services to commercial clients across various industries.
