Given the amount of paperwork and the fact that many of the employee retention credit claims pending processing were questionable at best and downright fraudulent at worst, the Internal Revenue Service launched a voluntary disclosure program last year that allows employers to withdraw their erroneous ERC claims without heavy penalties. If accepted into the program, an employer only has to repay 80% of the credit received.
Why 80%? Because many of the employers caught up in this spate of dubious ERC claims did so at the urging of what the IRS calls “aggressive promoters” — a cottage industry that sprung up around the many pandemic-era tax credits and quickly overtook the people calling you about your car’s extended warranty as the most obnoxious of all unsolicited calls. Even we got emails from these people promising us huge profits if our company applied for ERC credits, credits that these non-CPA peddlers swore were basically free money. Paycheck Protection Program (PPP) loans were indeed free money, ERC not so much, and exploiting the PPP free money glitch disqualified employers from double-taxing on ERC. Employers who fell for these promises paid the “aggressive promoter” who pressured them to file a fee that was due before they received any money from the IRS. So the IRS is unusually kind and does not require voluntary filers to repay the full amount they received in erroneous ERC. You can bet they will extract that pound of flesh from any “aggressive promoter” they can nail to the wall.
Many employers who have made ERC claims – not just those who have been duped by smooth-talking telemarketers, but also legitimate, qualified employers – are still waiting for payments.
The voluntary disclosure program was intended exclusively for employers who viewed the payouts as a way to repay their debts. retreat The program was designed for those still waiting for ERC claims to be paid, including employers with uncashed checks from the IRS, and carried no penalties. If a voluntary withdrawal was accepted, the IRS would pretend it never happened (“Withdrawn claims are treated as if they were never filed”) and everyone could move on with their lives.
ERC had very specific requirements, requirements that many applicants actually did not meet. As the name suggests, Employee Retention Credits were designed to encourage struggling employers to retain their employees during the early days of lockdowns. To qualify, an employer had to have paid some or all employees qualifying wages after March 12, 2020, and before January 1, 2022.
In general, tax-exempt businesses and organizations qualify if they:
- Were suspended due to an official order due to the COVID-19 pandemic in 2020 or in the first three calendar quarters of 2021, or
- Have experienced the required decline in gross revenue in 2020 or in the first three calendar quarters of 2021, or
- Qualified as a recovery startup company for the third or fourth quarter of 2021
By the time the IRS issued a moratorium on processing ERC applications in September 2023, it had already discovered thousands of applications that did not meet the basic criteria for the ERC program, such as A) being a business and B) having employees on the payroll. But there still remained many edge cases where it was not immediately clear whether they were legitimate or not. Last June, the agency announced that it had digitized and analyzed about a million ERC applications valued at more than $86 billion and was making progress in the difficult task of processing ERC applications in Fraud, maybe nonsenseAnd probably OK categories. They identified some common warning signs that were a recurring theme in many ERC applications that were about to be rejected or worse:
- Major companies that were able to continue operating without restrictions during the pandemic and did not experience a decline in gross revenue – The most basic requirement to qualify for ERC. Systemically important businesses were not eligible because their operations were not suspended or disrupted by government orders. “Changes that did not affect an employer’s ability to operate, such as requiring employees to wash their hands or wear masks, do not mean that business operations have been suspended,” the IRS explained.
- Companies that are unable to support an official order have completely or partially ceased their business operations – If everyone could stay home and continue working, the IRS would not consider business operations disrupted.
- Companies that report the wages of family members as qualified wages. – As described. Wages paid to related persons and members of the same household are not qualifying wages for the ERC.
And as noted above, another sign of a potentially invalid ERC claim is when businesses use wages that have already been used to receive PPP loan forgiveness. They cannot claim an ERC on wages they reported as payroll costs to receive PPP loan forgiveness.
Now imagine used car dealers trying to explain all of these rules to a hillbilly in Nebraska who was just trying to keep his business afloat in 2020.
Leading up to the end of the voluntary disclosure program on March 22, the IRS sent out numerous reminders that the deadline to admit that a company had improperly withdrawn ERC funds was rapidly closing. Hurry up and get it out there or it will hurt! This is your last chance, otherwise we’ll break your back! Don’t force us!
Well, they’ve reopened the window. The Voluntary Disclosure Program v.2 announced on August 15 is live and open until November 22. Here’s what they said:
The Employee Retention Credit (ERC) Voluntary Disclosure Program (VDP) runs through November 22 and gives companies the opportunity to correct improper payments with a 15% discount, avoiding future audits, penalties and interest. During the first disclosure program, which ended in March, there were more than 2,600 applications from ERC recipients disclosing $1.09 billion worth of credits.
To underscore the importance of participating in the Voluntary Disclosure Program, the IRS also announced that it plans to send up to 30,000 new letters to reverse or recover potentially more than $1 billion in improper ERC claims. Thousands more letters will be sent in the fall regarding other questionable payments.
“The limited reopening of the Voluntary Disclosure Program provides those with improper claims an opportunity to come forward ahead of IRS compliance work and receive a discount on refunds,” said IRS Commissioner Danny Werfel. “This is especially important given the increasing number of IRS compliance actions related to false claims. Many of these are the result of aggressive marketing tactics to lure unsuspecting businesses into claiming the complex credits. This provides these misled businesses a final window of opportunity to make adjustments and avoid future IRS compliance actions.”
2,600 applications are a lot, but compare that to the 1.4 million outstanding claims that the IRS had in June. After the moratorium in September, the IRS recorded more than 17,000 ERC claims every week.
“The initiators’ initiative flooded the IRS with questionable ERC claims, clogging our systems and slowing work,” Werfel said. “We know well-meaning businesses are involved, and we are taking important steps to help them. This includes reopening the Voluntary Disclosure Program and disbursing more payments to eligible businesses.”
As of May, IRS Criminal Investigation has initiated 450 criminal investigations involving nearly $7 billion in potentially fraudulent ERC claims. To date, 36 investigations have resulted in federal indictments, 16 investigations have resulted in convictions, and seven have resulted in sentences with an average prison sentence of 25 months.
IRS resumes voluntary disclosure program to help businesses with problematic employee retention credit claims; up to 30,000 letters will be sent to resolve over $1 billion in erroneous claims (Tax Authority)
