The Employee Retention Credit (ERC), a refundable tax credit established under the CARES Act to help businesses impacted by COVID-19, has provided valuable tax relief to many businesses that continued to pay employees throughout the pandemic. Unfortunately, due to confusion about eligibility criteria, as well as outright fraud by some dubious tax credit promoters, thousands of businesses applied for and even received ERC in error.

To address misuse of the ERC program, the IRS has dramatically increased its scrutiny of ERC claims and has introduced an ERC Voluntary Disclosure Program, which allows businesses that applied for and received ERC in error an opportunity to withdraw their claims without facing penalties.

The ERC Voluntary Disclosure Program will close on Nov. 22, 2024, however, so businesses should act quickly if they are concerned their ERC claims may not meet IRS requirements.

What is the ERC Voluntary Disclosure Program?

The ERC Voluntary Disclosure Program allows businesses that claimed ERC in error to withdraw their claims by:

• Submitting an application to participate in the program,
• Cooperating with all IRS requests, e.g., for additional information,
• Voluntarily repaying all ERC amounts received, less 15%, and
• Signing a closing agreement with the IRS.

In exchange, businesses that participate in the program will not face an employment tax audit, will not be subject to interest and penalties for their ERC claims, and will not be required to amend their income tax returns to reduce wage expenses to the extent of the ERC since the business is no longer claiming entitlement to ERC.

Who is Eligible for the ERC Voluntary Disclosure Program?

Businesses are eligible for the ERC Voluntary Disclosure Program (VDP) if they applied for and received ERC funds but later found they did not fully meet the requirements and are eligible for the ERC VDP. The program generally covers issues such as:

• Misinterpretations of gross receipts qualifications,
• Confusion over the impact of government orders on business operations,
• Uncertainty about “nominal effect” on operations.

The program does not apply to cases involving fraudulent claims or intentional misstatements, nor does it apply where a business is already under criminal investigation or under IRS audit with respect to its ERC claims.

Why Act Before Nov. 22?

The ERC VDP is a temporary program and will close on Nov. 22, 2024. After that date, businesses that claimed and received ERC in error and have not applied to participate in the program may face IRS scrutiny, including significant penalties and interest if their ERC claims are determined to be in error.

Bottom Line

With the IRS dramatically ramping up ERC enforcement, businesses should assume that an audit with respect to their ERC claims is a near certainty. The ERC VDP offers businesses a rare opportunity to come forward before an audit to correct any errors on favorable terms and avoid the possibility of penalties, interest, lengthy audits, or even criminal prosecution.