Fixing ERC Claims: How Businesses Can Avoid IRS Penalties with Voluntary Disclosure

The Employee Retention Credit (ERC) has been a crucial relief measure for many businesses during the COVID-19 pandemic, providing much-needed financial support to retain employees. However, the process of claiming the ERC has become complicated, with many employers inadvertently or intentionally making improper claims. The IRS has started denying these claims and penalizing businesses that were not eligible for the credit. Fortunately, there is still hope for employers who acted in good faith but now realize they may not have qualified for the ERC.

In this article, we’ll dive into the IRS’s recent developments regarding ERC claims, including their offer to employers to voluntarily withdraw incorrect claims. This could be a second chance to avoid penalties and correct any errors in the claims process.

Before diving into the details, check out our video on this very topic: IRS Offers: Second Chance to Fix ERC Claims

A Warning for Employers: The Risks of Improper ERC Claims

 

Earlier this year, we warned employers about third-party advisors encouraging them to claim the ERC even when they might not qualify. These advisors often present the credit as “free money,” downplaying the strict eligibility criteria. As a result, many businesses filed for the ERC without fully understanding the requirements or verifying their eligibility.

Now, the IRS is catching up to these improper claims. Employers who were not eligible for the ERC and still claimed it are facing audits, recaptures, and penalties. The IRS is actively denying these credits, leaving some businesses with hefty fines and the burden of repaying the credits.

However, the IRS is not entirely shutting the door on these businesses. In a move to help employers correct their mistakes, they’ve introduced a second Voluntary Disclosure Program, offering employers a chance to fix their ERC claims without facing harsh penalties.

What Is the IRS Voluntary Disclosure Program?

The IRS Voluntary Disclosure Program was designed to give businesses that claimed the ERC in error the opportunity to come forward and voluntarily withdraw their claims. The first version of this program concluded on March 22, 2024, and was quite successful, with over 2,600 employers participating.

Now, the IRS has introduced a second phase of the Voluntary Disclosure Program, which will expire on November 22, 2024. This gives businesses a limited window to reassess their claims and make any necessary corrections.

How Does the Second ERC Voluntary Disclosure Program Work?

To participate in the second ERC Voluntary Disclosure Program, employers must meet several specific criteria. Here’s a breakdown of the key points:

1. Eligibility for 2021 Claims: This second program only applies to claims made for the 2021 tax year. Employers who filed ERC claims for 2020 or earlier tax periods will not be eligible to participate.
2. No Prior Examination or Investigation: Businesses must not currently be under IRS examination or involved in a criminal investigation related to their ERC claim. This means that if your claim is already being reviewed or audited, you won’t qualify for the voluntary disclosure program.
3. No Demand for Repayment: Employers must not have received a notification of ERC recapture or a formal demand for repayment. If the IRS has already flagged your claim for recapture, it’s too late to voluntarily withdraw through this program.

If your business meets these criteria, the second Voluntary Disclosure Program provides an opportunity to correct any mistakes in your ERC claims and potentially avoid penalties and recapture actions.

Why Should Employers Take Advantage of This Program?

Correcting an improper ERC claim before the IRS initiates an audit or demands repayment can save your business from significant financial penalties. Even if the claim was made in good faith, an incorrect claim can result in costly consequences.

By voluntarily withdrawing your claim, you can signal to the IRS that you are acting in good faith and want to resolve the issue without waiting for them to take action. This can lead to more favorable outcomes and protect your business from the reputational damage that can come with an IRS audit or criminal investigation.

What Should Employers Do Next?

If you suspect that your business may have claimed the ERC improperly or if you’re unsure whether you meet the eligibility requirements, it’s crucial to take action now. Here are the steps you should follow:

1. Review Your ERC Claims: Go over the details of your 2021 ERC claims and ensure that they were made in compliance with IRS guidelines. If you’re unsure, it’s a good idea to consult with a qualified tax professional who can help you assess your eligibility.
2. Seek Professional Guidance: Navigating the IRS Voluntary Disclosure Program can be complex, and making a mistake could result in further penalties. Contact a tax professional or our office for guidance on whether your business qualifies for the program and how to proceed.
3. Act Before November 22, 2024: The deadline to participate in the second Voluntary Disclosure Program is fast approaching. Don’t wait until the last minute—if you believe you may need to correct your ERC claim, start the process now to avoid missing the deadline.

Conclusion

The Employee Retention Credit was a vital resource for businesses during the pandemic, but improper claims can lead to significant penalties and audits. The IRS’s second Voluntary Disclosure Program offers a lifeline for businesses that may have made errors in their ERC claims, giving them a chance to correct those mistakes without facing severe consequences.

If you’re unsure whether your business qualifies for the ERC or if you need assistance with the Voluntary Disclosure Program, contact us today. Our team of experts is here to help you navigate the complexities of the IRS and keep your business on the right financial path.

Remember, the deadline to participate in this program is November 22, 2024, so don’t delay—act now to protect your business!

JS Morlu LLC is a top-tier accounting firm based in Woodbridge, Virginia, with a team of highly experienced and qualified CPAs and business advisors. We are dedicated to providing comprehensive accounting, tax, and business advisory services to clients throughout the Washington, D.C. Metro Area and the surrounding regions. With over a decade of experience, we have cultivated a deep understanding of our clients’ needs and aspirations. We recognize that our clients seek more than just value-added accounting services; they seek a trusted partner who can guide them towards achieving their business goals and personal financial well-being.
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