Employers get a break on sketchy ERCs

The Internal Revenue Service is taking another step against a troublesome pandemic-era credit: The agency has launched a voluntary disclosure program for businesses who want to pay back the money they received after filing Employee Retention Credit claims in error.

The program, part of a larger IRS effort to stop aggressive marketing around sketchy ERCs, runs through March 22, which is also the deadline for applying. Employers will be able to repay 80% of the claim received free of penalties and interest. 

Employers who are unable to repay that much of the credit may be considered for an installment agreement, though they will have to pay penalties and interest.

The IRS selected an 80% repayment because many of the ERC promoters charged a percentage fee that they collected at the time of payment or in advance of the payment, and the recipients never received the full amount.

Al Drago/Bloomberg

When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees during the pandemic while their business operations were either fully or partially suspended by government order or that suffered a decline in gross receipts.

In the months since, ERC "mills" lured many businesses into faulty ERC claims. The IRS has more than 300 criminal cases being worked, with claims worth almost $3 billion, and thousands of ERC claims have been referred for audit.

The IRS urges employers with pending ERC claims to consider a separate withdrawal program that allows them to remove a pending ERC claim with no interest or penalty; it has received more than $100 million in withdrawals. The agency continues to promise sharper audits and criminal investigations around the ERC, and earlier this month mailed 20,000 denial letters to ERC claimants.

A 'mess'

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"The disclosure program provides a much-needed option for employers who were pulled into these claims and now realize they shouldn't have applied," said IRS Commissioner Danny Werfel in a statement. "We understand that there are many employers eager to correct their error but who remain concerned about their ability to pay back the portion of the credit that has been lost to the promoter that brought them into this mess."

The employer must provide the IRS with the names, addresses and telephone numbers of any advisors or tax preparers who advised or assisted them with their claim and details about services provided. (More details are in Announcement 2024-3 on IRS.gov.)

The IRS has also started sending up to 20,000 letters with proposed tax adjustments that will recapture erroneously claimed ERCs. These mailings — which are on top of the 20,000 denial letters announced earlier in December — are just for tax year 2020; work continues for tax year 2021, with additional mailings planned.

If the IRS identifies an employer that has received excessive or erroneous ERC, the agency will reclaim that ERC through normal tax assessment and collection procedures.

"The disclosure program's 80% repayment figure is much more generous than later IRS action," Werfel said.

Who can apply?

Any employer who already received the ERC for a tax period but isn't entitled to it can apply if they're not under criminal investigation and haven't been notified that they are under such investigation; if they're not under an IRS employment tax examination for the tax period for which they're applying to the program; and if they haven't received an IRS notice and demand for repayment of part or all of the ERC. 

Also, the IRS cannot have received information from a third party that the taxpayer is out of compliance or hasn't acquired information directly related to the non-compliance from an enforcement action.

To apply, the employer must first file Form 15434, "Application for Employee Retention Credit Voluntary Disclosure Program," available on IRS.gov and submitted on the agency's Document Upload Tool. Employers who outsource their payroll must apply through the third party using the latter's EIN. In this situation, the third party must file the15434.

Once the employer has applied to the program and submitted their Form 15434, an IRS employee will contact them to go over the application. If the application is approved, the IRS will mail the employer a closing agreement. The employer must then repay 80% of the ERC they received via the Electronic Federal Tax Payment System.

For more on ERC eligibility, see the ERC FAQs and the ERC Eligibility Checklist, available as an interactive tool or as a printable guide.