If your company claimed the Employee Retention Tax Credit (ERC), then you may be interested to know that the IRS has announced a Voluntary Disclosure Program (VDP) to allow claimants and recipients to voluntarily repay the amounts received. The IRS had previously announced a voluntary withdrawal program, but that program did not sufficiently address situations where claimants had already received funds.
Here are four key things to know about the VDP:
- Why you would consider. In late 2023, the IRS sent more than 20,000 letters to ERC claimants, seeking repayment for amounts claimed improperly and for reimbursement of amounts that were overpaid to such claimants. Additionally, the IRS has commenced audits and criminal prosecutions* for companies they think incorrectly claimed and/or received the ERC. This is likely just the first wave of letters.
- Advantages. The biggest advantages of the VDP are: You only need to repay 80 percent of the ERC you received, you do not need to repay any interest you received on your ERC refund, you do not have to amend income tax returns to reduce wage expense, the 20 percent reduction is not taxable as income, and the IRS will not charge penalties or interest on the claimed ERC amount if you pay it in full by the time you return your signed closing agreement to IRS.
- Who can apply. You may utilize the VDP if: a) Your ERC, claimed on an employment tax return, has been processed and paid as a refund which you have cashed or deposited, b) Your ERC was paid in the form of a credit applied to the tax period or another tax period, and c) You now think that you were entitled to $0 ERC.
- Who cannot apply. You may not avail yourself of the VDP if any of the following apply: a) You are already under an employment tax audit by the IRS, b) You are already under criminal investigation by the IRS, or c) The IRS has already notified you of intent to reverse your ERC to $0, via a letter or notice from the IRS disallowing your ERC.
Note: You must apply to the VDP prior to March 22, 2024, but also before any of the items above apply to you. Therefore, if you think you may have applied for/received the ERC in error, you should act quickly.
* As of now, the VDP does not provide amnesty from criminal prosecution.
If you have any questions regarding your liability for the ERC overpayment, or for any other legal issues related to business or estate planning, please contact Fournier Legal Services.
Joseph E. Fournier is an Attorney and a CPA who has more than twenty years of experience in a variety of business legal matters, including start-ups and company formations, drafting shareholder and operating agreements, contracts, employment law, commercial litigation, tax planning and audit defense, and mergers and acquisitions (M&A). He also handles estate planning matters, such as business succession planning, wills, trusts, and probate.