The Internal Revenue Service (IRS) has introduced a second Employee Retention Credit (ERC) Voluntary Disclosure Program, as announced in Announcement 2024-30. This program is designed to address the issue of erroneous claims made under the ERC, a refundable tax credit created to support businesses and tax-exempt organizations that continued paying their employees during the COVID-19 pandemic under specific conditions.
The ERC: Background and Purpose
The Employee Retention Credit (ERC) was established to provide much-needed financial relief to businesses that faced significant challenges during the pandemic. Specifically, it was aimed at those that:
- Were fully or partially suspended due to government orders,
- Experienced a significant decline in gross receipts,
- Were classified as recovery startup businesses during the pandemic.
However, the IRS has identified a rising concern regarding fraudulent claims and misleading advertisements that have led to improper ERC claims. To address these issues, the IRS has launched this second Voluntary Disclosure Program, building on the first program’s efforts to correct such claims.
Insights from the First ERC Voluntary Disclosure Program
The first ERC Voluntary Disclosure Program, which concluded on March 22, 2024, saw over 2,600 participants. This program allowed employers to resolve their improper claims by retaining 20% of the claimed ERC amount while settling their employment tax obligations. Due to its success, the IRS has introduced a second program, with some modifications to its terms and eligibility criteria.
Eligibility Criteria for the Second ERC Voluntary Disclosure Program
To participate in the second ERC Voluntary Disclosure Program, applicants must meet specific eligibility criteria:
- Only Available for 2021 Claims: This program is limited to ERC claims filed for the 2021 tax periods. The employer must have received a credit or refund before August 15, 2024.
- Non-Criminal Status: Participants must not be under criminal investigation or have been notified of such intentions by the IRS.
- Third-Party Information: The IRS should not have received third-party information indicating noncompliance.
- Examination Status: Participants should not be under employment tax examination for the relevant periods.
- Recapture and Repayment Notices: Participants must not have been notified of ERC recapture or received a demand for repayment.
Key Terms of the Program
The second ERC Voluntary Disclosure Program includes several important terms that participants need to be aware of:
- Employment Tax Adjustments: Participants will not be entitled to any ERC for the periods in question and must remit 85% of the claimed amount back to the Treasury.
- Interest and Penalties: The IRS will not require participants to repay overpayment interest. Additionally, no underpayment interest will apply if full payment is made before the execution of the closing agreement. The IRS will also not impose civil penalties related to the underpayment of employment tax attributable to the claimed ERC.
- Income Tax Effects: Participants are not required to amend their income tax returns to adjust wage expenses related to the ERC.
- Preparer/Advisor Information: Participants must disclose information about any preparers or advisors involved in the ERC claim.
Application Process: Steps to Participate
If your business meets the eligibility criteria and you wish to participate in the program, here’s what you need to know about the application process:
- Form Submission: Participants must submit Form 15434, the Application for Employee Retention Credit Voluntary Disclosure Program, by November 22, 2024. This form must be completed under penalties of perjury and include detailed information about the taxpayer and the claimed ERC.
- Payment: Payments should be made through the Electronic Federal Tax Payment System (EFTPS), with separate payments for each tax period. If full payment cannot be made, participants may request alternative arrangements, such as installment agreements.
- Closing Agreement: Once the required information is submitted, the IRS will prepare a closing agreement. Participants must sign and return this agreement within 10 days. This agreement finalizes the terms of the settlement and ensures compliance with the program’s requirements.
Why Participating in the Second ERC Voluntary Disclosure Program Matters
This second ERC Voluntary Disclosure Program is a crucial opportunity for businesses to rectify erroneous ERC claims without facing severe penalties or litigation. By participating, businesses can resolve their tax liabilities while retaining a portion of the claimed credit, thus avoiding potential legal complications.
If your business claimed the ERC during 2021 and you’re uncertain about the validity of your claim, this program offers a structured way to address any issues. Participating could save your business from significant financial and legal consequences.
Final Thoughts
The IRS’s introduction of the second ERC Voluntary Disclosure Program reflects its ongoing efforts to ensure the integrity of the tax system while providing businesses with an avenue to correct their mistakes. For those who may have inadvertently made an improper claim, this program is an opportunity to come forward and resolve any issues without severe repercussions.
If you have questions or need assistance with the application process, our office is here to help. We can guide you through the steps to ensure your business complies with the program’s requirements and navigates the process smoothly.
By taking proactive steps now, your business can avoid more significant issues down the road, ensuring continued compliance and financial stability.
