If you are the owner of a small business, chances are you have been approached by multiple firms or individuals promising large refunds by way of the Employee Retention Credit (ERC). These promoters usually charge a large fee based on the amount of the ERC and often do not understand the complex rules and eligibility requirements. As a result, taxpayers are susceptible to the possibility of having filed improper refund claims, for which they will have to pay back the refunds with penalties and interest upon audit. There may be criminal penalties as well.
The IRS previously declared an immediate moratorium through the end of 2023 on processing new ERC claims. The IRS noted rising concerns about the number of improper claims being filed and stated that the moratorium would allow the IRS to implement safeguards to prevent future abuse.
Following the moratorium, the IRS announced a withdrawal process for ERC claims, allowing employers who filed ERC claims but did not yet receive refunds to withdraw their claim to avoid future repayment, interest, and penalties. Essentially, withdrawn claims will be treated as if never filed.
To resolve erroneous claims that have already been paid, the IRS has developed an Employee Retention Credit Voluntary Disclosure Program (the Program). This is aimed to help taxpayers that may have fallen victim to these promoters and, as a result, may have filed improper refund claims and received erroneous ERC payments.
Taxpayers who believe they may have received an improper ERC refund may wish to consult with their legal counsel on the matter and may wish to take advantage of this Program.
In Announcement 2024-3, the IRS describes the specific eligibility requirements to participate in the Program, which are:
- The participant is not under criminal investigation, and they have not been notified that the IRS intends to commence a criminal investigation;
- The IRS has not received information from a third party alerting the IRS to the participant’s noncompliance, nor has the IRS acquired information directly related to the noncompliance from an enforcement action;
- The participant is not under an employment tax examination by the IRS for any tax period(s) for which the taxpayer is applying for this Program; and
- The participant has not previously received notice and demand for repayment of all or part of the claimed ERC.
If the eligibility requirements are met and the participant wants to proceed, the participant and IRS will agree that the participant is not eligible for or entitled to any ERC (refundable and non-refundable portions) for the tax periods in question, and the participant will remit back to the Department of Treasury 80% of the claimed ERC. Additionally, under the terms of the agreement, the participant will not be required to repay any overpayment interest they received, and, if the participant pays back the full 80% of the claimed ERC prior to executing the closing agreement, the participant will not be assessed underpayment interest or civil penalties related to the underpayment of employment tax attributable to the claimed ERC. If the participant is unable to payback 80% of the ERC claimed prior to executing the closing agreement, the participant can enter into an installment agreement, pending approval, but would be subject to penalties and interest associated with entering into such agreement.
Another taxpayer-friendly provision of the Program is that participants who keep 20% of the ERC claimed will not be required to reduce wage expense by any of the previously claimed ERC. As a result, those taxpayers participating in the Program who have not previously reduced wages by the claimed ERC will not be required to file an amended return or an Administrative Adjustment Request (AAR) to reduce wage expense. If the participant had previously reduced wage expense by any of the claimed ERC and was planning to file an amended return or AAR adjusting the wage expense in order to report the tax effects of this program, the participant will not need to reduce wage expense by the 20% of the claimed ERC that is being kept. Additionally, the retained 20% of the claimed ERC is nontaxable.
As part of the Program, the participant must provide the IRS with information about the return preparer or advisor who assisted or advised with any portion the ERC claim, including the name, address, and telephone number of the preparer(s) or advisor(s) and a description of the services they provided.
The announcement further outlines the procedures to participate in the Program. Participants are required to notify the IRS of the election to participate by completing and submitting Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, on or before 11:59 p.m. local time on March 22, 2024. The submission with required attachments is made electronically under penalties of perjury through the Document Upload Tool located at irs.gov/DUT. Remittance of 80% of the claimed ERC must be made electronically using the Electronic Federal Tax Payment System, and each payment should be made separately under the category “Advanced Payment” for each tax period upon submission of Form 15434. Once the requested information is received, the IRS will issue a closing agreement and mail it to the participant who must sign, date, and return it to the IRS within 10 days of the date of mailing by the IRS (extensions may be granted for good cause upon request).
With the submission deadline fast approaching and the IRS expanding its efforts to issue denial of claims, thereby preventing eligibility in the settlement program, it is essential to discuss your options with legal counsel. Waiting and not taking advantage of this program can result in unintended financial consequences. For more information, reach out to your tax professional or a member of your engagement team.
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