IRS Announces Withdrawal and Voluntary Disclosure Programs for Employee Retention Credits
In late December 2023, the IRS announced its Voluntary Disclosure Program for employers who claimed and received an employee retention tax credit (“ERC”) refund, but were not eligible. The IRS’s Voluntary Disclosure Program follows its announcement in October 2023 that it would allow employers with submitted—but not yet paid—ERC claims to withdraw their filings without penalty.
Background on ERC and IRS enforcement
The ERC is a complex refundable tax credit intended for employers that continued paying employees during the COVID-19 pandemic when either (a) their operations were fully or partially suspended due to governmental orders, or (b) they experienced a significant decline in gross receipts as compared to 2019. Additional information about the ERC is available here.
Aggressive ERC firms published false and misleading advertisements regarding the eligibility requirements for the ERC, leading many employers to believe they were eligible when they were not. (In fact, many ERC firms alleged that all employers are eligible. This is not the case.) As a result, the IRS has announced its intention to “step up” its enforcement actions involving ERC claims. For example, in early December, the IRS mailed 20,000 disallowance letters, and more and more ERC firms are being closely examined (whose clients are no doubt on the IRS’s audit list).
In the absence of the IRS’s withdrawal program or Voluntary Disclosure Program, employers who have received the ERC refunds but who are not, in fact, eligible, could face enforcement action from the IRS for recovery of the full amount of the ERC refund, plus interest and penalties. We anticipate the IRS will take a hardline approach on its enforcement action for these claims, especially in light of its announcement of these programs.
The IRS will accept an employer’s request to withdraw its ERC claim under a special withdrawal program. The withdrawal program is for employers whose ERC claim has been filed but not yet paid by the IRS (or who have received a check but have not yet cashed or deposited it). If an employer requests to withdraw its claim, it will be treated as though it were never filed, and the IRS will not impose penalties or interest.
Voluntary Disclosure Program
The Voluntary Disclosure Program is available to employers who have already received an ERC credit or refund and if:
- The employer is not under criminal investigation and has not been notified that the IRS intends to commence a criminal investigation;
- The IRS has not received information from a third party alerting the IRS to the employer’s noncompliance;
- The employer is not under an employment tax examination by the IRS for any tax periods for which the taxpayer is applying for the Voluntary Disclosure Program; and
- The employer has not previously received notice and demand for repayment of all or any part of the claimed ERC.
Under the Voluntary Disclosure Program, eligible employers must pay back only 80% of the claimed ERC. If the IRS paid interest on the amount of the ERC received, the employer is not required to repay any interest. The IRS will issue a closing letter, upon which the employer will generally avoid penalties and interest on the entire ERC claimed or refunded. Finally, the IRS will not audit the periods for which the employer filed under the Voluntary Disclosure Program. The IRS’s website includes a frequently asked questions page (available here) about the program.
To participate in the Voluntary Disclosure Program, taxpayers must complete and submit an application on the IRS Form 15434 by March 22, 2024.
Employers questioning whether they were, in fact, eligible for the ERC should consider applying for the IRS’s withdrawal program or Voluntary Disclosure Program. Employers who participate in the Voluntary Disclosure Program should work with their tax advisors to amend their income tax returns for prior years, to adjust the deductions claimed for the applicable wage expenses in the years in which the employer had received the ERC refunds.