Great News for Employers Who Received Questionable Employee Retention Credits

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22 December 2023
Small Business
David M Robson

Article Highlights:

  • Combating Dubious Employee Retention Credit (ERC) Claims
  • New Voluntary Disclosure Program
  • Employer Benefits
  • Applying for the New Voluntary Disclosure Program
  • When the 80% is Due
  • Installment Payment Plan
  • Other Ongoing ERC Initiatives
  • Claim Withdrawal Still Available

The IRS has introduced a New Voluntary Disclosure Program that allows employers who received questionable Employee Retention Credits (ERC) to pay them back at a discounted rate. This is a different program from the one IRS created earlier for those who haven’t received payment from the IRS and want to withdraw their ERC claim, which is discussed later in this article.

As part of an ongoing initiative aimed at combating dubious Employee Retention Credit claims, the IRS has announced it is launching a new program to help businesses that want to pay back the money they received after filing ERC claims in error.

NEW VOLUNTARY DISCLOSURE PROGRAM

This new program is part of a larger effort by the IRS to stop aggressive marketing around the ERC that misled some employers into filing claims.

Interested employers must apply to the ERC Voluntary Disclosure Program by March 22, 2024. Those that the IRS accepts into the program will benefit from the following:

  • They need only repay 80% of the credit they received.
  • If the IRS paid interest on the employer’s ERC refund claim, the employer would not need to repay that interest.

Who Can Apply - A variety of ERC recipients can apply. Any employer who already received the ERC for a tax period but isn’t entitled to it can apply if the following are also 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 for which they’re applying to the Voluntary Disclosure Program.
  • The employer has not received an IRS notice and demand for repayment of part or all 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 noncompliance from an enforcement action.

How To Apply - To apply, an employer must first file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, available on IRS.gov. This form must be submitted using the IRS Document Upload Tool. Employers will be expected to repay their full ERC, minus the 20% reduction allowed through the Voluntary Disclosure Program.

Employers who are unable to repay the required 80% of the credit may be considered for an installment agreement on a case-by-case basis, pending submission and review of a Form 433-B, Collection Information Statement for Businesses, available on IRS.gov, and all required supporting documentation.

The IRS will not charge program participants interest or penalties on any credits they repay. However, if the employer is unable to repay the required 80% of the credit at the time of signing their closing agreement, then the employer will be required to pay penalties and interest in connection with entering into an installment agreement.

Why isn’t the IRS requiring payment of 100% of the ERC the employer received? 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.

After an Application is Approved - If the IRS approves the employer’s application, they will mail the employer a closing agreement, which the employer must sign and return to the IRS within 10 days of the date the IRS mailed it. The employer must then repay 80% of the ERC they received, either online or by phone, using the Electronic Federal Tax Payment System (EFTPS). EFTPS is the Treasury Department system that most businesses already use to pay various federal tax obligations.

Employers Who Outsource Their Payroll Must Apply Through the Third Party - Many employers outsource their payroll obligations to a third party who reports, collects, and pays employment taxes on the employer’s behalf using the third party’s Employer Identification Number. In this situation, the third-party, not the employer, must file Form 15434. See the form and its instructions for details.

Other Ongoing ERC Initiatives - The new Voluntary Disclosure Program is just the latest step taken by the IRS in its ongoing fight against ERC fraud.

  • In July, the IRS said it was shifting its focus to review ERC claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims.
  • Following concerns from tax professionals and others about aggressive ERC marketing, the IRS announced Sept. 14 a moratorium on processing new ERC claims. Enhanced compliance reviews of existing claims submitted before the moratorium is critical to protect against fraud and to protect businesses and organizations from facing penalties or interest payments stemming from bad claims pushed by promoters.
  • Then, earlier this month, the IRS began sending an initial round of more than 20,000 letters to employers disallowing their ERC claims either because their business did not exist, or they didn’t have employees for the period covered by their claim.
  • In addition to these efforts, IRS audit and Criminal Investigation work involving ERC continues to expand involving dubious claims. The IRS has more than 300 criminal cases being worked with claims worth almost $3 billion, and thousands of ERC claims have been referred for audit.

CLAIM WITHDRAWAL STILL AVAILABLE

Still Time to Withdraw Pending ERC Claims - The IRS is also continuing to accept and process requests to withdraw an employer’s full ERC claim under a special withdrawal process.

The IRS has created a withdrawal option to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose penalties or interest. The IRS continues to warn taxpayers to use extreme caution before applying for the ERC as aggressive maneuvers continue by marketers and scammers.

However, those who willfully filed a fraudulent claim, or those who assisted or conspired in such conduct, should be aware that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.

Employers can use the ERC claim withdrawal process if all the following apply:

  • They made the claim on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X).
  • They filed the adjusted return only to claim the ERC, and they made no other adjustments.
  • They want to withdraw the entire amount of their ERC claim.
  • The IRS has not paid their claim, or the IRS has paid the claim, but the taxpayer hasn’t cashed or deposited the refund check.

To take advantage of the claim withdrawal procedure, the special instructions at IRS.gov/withdrawmyERC should be carefully followed and are summarized below.

  • Taxpayers whose professional payroll company filed their ERC claim should consult with the payroll company. The payroll company may need to submit the withdrawal request for the taxpayer, depending on whether the taxpayer’s ERC claim was filed individually or batched with others.
  • Taxpayers who filed their ERC claims themselves, haven’t received, cashed, or deposited a refund check and have not been notified their claim is under audit should fax withdrawal requests to the IRS using a computer or mobile device. The IRS has set up a special fax line to receive withdrawal requests. This enables the agency to stop processing before the refund is approved. Taxpayers who are unable to fax their withdrawal using a computer or mobile device can mail their request, but this will take longer for the IRS to receive.
  • Employers who have been notified they are under audit can send the withdrawal request to the assigned examiner or respond to the audit notice if no examiner has been assigned.

Those who received a refund check, but haven’t cashed or deposited it, can still withdraw their claim. They should mail the voided check with their withdrawal request using the instructions at IRS.gov/withdrawmyERC.

If you have submitted an ERC claim and are concerned about its validity and would like this office to review the claim, or need assistance withdrawing a claim, please contact this office.

David M Robson