Amid its review of thousands of fraudulent Employee Retention Credit (“ERC”) applications, the Internal Revenue Service (“IRS”) has instituted multiple programs to provide relief to unsuspecting taxpayers victimized by the cottage industry of specialist ERC firms born of the COVID-19 pandemic. Many of these applications aggressively interpret the “business operations suspension test” and rely on weak promoter opinions that an employer’s business operations were suspended due to COVID-19 related governmental orders, citing recommendations, guidelines, and suggestions as governmental orders. Considering recently developed IRS guidance such as Generic Legal Advice Memorandum 2023-007 issued on Nov. 3, 2023 (holding that an employer may not rely on OSHA communications to satisfy the business operations suspension test), such opinions are now clearly at odds with published IRS positions, subjecting taxpayers to the possibility of audits, repayment obligations, penalties, and interest.
In addition to other programs, on December 21, 2023, the IRS launched a new Voluntary Disclosure Program (“VDP”) aimed at counteracting wrongful ERC claims by offering taxpayers a discounted repayment option. Employers who received an ERC for which they did not qualify can apply to the VLP until March 22, 2024. Accepted applicants will be required to repay only 80% of the ERC received without interest or penalties. Repayment pursuant to an installment agreement will be considered on an ad hoc basis, subject however to penalties and interest.
To be eligible for the VDP, an employer must not be under criminal investigation or an IRS employment tax examination for the ERC claim period. Additionally, the employer must not have received an IRS notice and demand for repayment of all or part of the ERC, and the IRS must not have received information related the employer’s noncompliance from a third party or an enforcement action.
To apply, applicants must electronically file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, available on IRS.gov. In the case of employers outsourcing payroll to a third party, the third-party service provider must file Form 15434. When filing, applicants must provide the name and contact information of any preparer or advisor who assisted with making the ERC claim.
Upon repayment of 80% of the ERC, a VDP participant is not required to reduce wage expense with respect to any of the previously claimed ERC and need not file an amended return or Administrative Adjustment Request (“AAR”) to reduce wage expenses, if wage expenses were not previously reduced by any of the claimed ERC.
Employers can use the IRS’s Employee Retention Eligibility Checklist tool to help determined if they are eligible for a claimed ERC, available at https://www.irs.gov/newsroom/employee-retention-credit-eligibility-checklist-help-understanding-this-complex-credit.
As stated, the VDP is just one move taken by the IRS to combat ERC abuse. Other steps include a program announced on October 19, 2023, allowing employers to withdraw pending ERC claims and avoid future repayment, interest, and penalties.
To learn more about the VDP and the ERC claim withdrawal process, contact a member of the Jackson Kelly PLLC Tax Practice Group.