The Internal Revenue Service is giving businesses that discover they’ve benefited from an incorrect Employee Retention Credit (ERC) claim a chance to correct that error.
The tax agency announced today that a it is reopening for a limited time its ERC Voluntary Disclosure Program (VDP). This second ERC disclosure period, which will be open through Nov. 22, will be similar to the original one that ended this spring.
In addition to relying on taxpayers to voluntarily correct their wrong ERC claims, the IRS says it also will mail up to 30,000 new letters to reverse or recapture potentially more than $1 billion in improper ERC claims.
The new disclosure period and follow-up notices is the latest in the IRS’ continuing effort to resolve problems with this complex business tax break. It was created in 2020 to help businesses and their staff stay afloat during the COVID-19 pandemic.
ERC confessions, take two: The reopening of the ERC VDP through Nov. 22 comes as the IRS intensifies its compliance work involving improper claims of the complex business tax break.
Note, though, that this second disclosure chance is not quite as beneficial as the original one. Businesses that now disclose receipt of federal funds due to improper ERC claims for tax periods in 2021 can repay those amounts at a 15 percent discount. The first VDP, which ended March 22, offered a 20 percent discount.
Less favorable follow-up programs are not uncommon. Previous IRS disclosure programs, such as those that focused on offshore tax shelters, tend to offer slightly less to latecomers.
But those businesses just now getting in on the disclosure offer will at least get their tax accounts corrected.
The IRS says the first ERC VDP program resulted in the agency receiving more than 2,600 applications on which recipients disclosed $1.09 billion worth of improperly claimed credits.
More importantly, the ERC corrections and paybacks will help the filers avoid future potentially costly tax audits, penalties, and interest. Or worse.
The IRS says that as of July 1, its Criminal Investigation unit has initiated 460 ERC-related criminal cases, with potentially fraudulent claims worth nearly $7 billion. Thirty-seven of those investigations have resulted in federal charges so far; defendants in 17 investigations were convicted; and the jail sentences issues in nine instances averaged 20 months.
Part of a larger ERC correction effort: The IRS, however, would like to deal with improper ERC claims before things escalate, hence this second ERC disclosure opportunity.
It is the carrot portion of the IRS’ comprehensive effort to sort through and clean up the mess that questionable ERC claims have created for both the agency and taxpayers.
The stick component is up to 30,000 letters the IRS will mail this fall. The notices will alert recipients that the agency is reversing or recapturing their improperly paid ERC claims.
These clawback notices potentially represent more than $1 billion in claims from tax year 2021, as well as some additional, later-filed tax year 2020 claims.
This is the second round of such ERC correction notices. The first batch of ERC clawback letters went to more than 12,000 entities that had filed improper claims for tax year 2020. Those notices resulted in $572 million in assessments, according to the IRS.
The letters going out this fall generally will involve larger ERC claims because Congress increased the maximum ERC in 2021. The tax break went from a maximum $5,000 per employee per year in 2020 to $7,000 per employee for each quarter of the year in 2021.
The IRS notes that those who receive recapture letters will be ineligible to participate in the VDP for the calendar quarter the letter covers.
Disclose to avoid future tax trouble: “The limited reopening of the Voluntary Disclosure Program provides an opportunity for those with improper claims to come in ahead of IRS compliance work and get a discount on repayments,” said IRS Commissioner Danny Werfel in announcing the second ERC correction period.
Many of the questionable ERC claims were made by business owners who took advice of aggressive marketers who told them they qualified for the complex credit. The unexpected crush of claims clogged IRS systems and slowed the agency’s work.
The IRS is gathering information about suspected abusive tax promoters and preparers who improperly promoted the ability to claim the ERC. The agency’s Office of Promoter Investigations has received hundreds of referrals.
But the bottom tax line is that deceived businesses must bear the tax consequences of their wrong ERC claims. This second ERC VDP, added Werfel, offers misled businesses “a final window of opportunity … to make adjustments and avoid future compliance action by the IRS.”
Other ERC correction options, details: Additional details on the latest ERC VDP are available in IRS Announcement 2024-30, also released today.
For a less legalese version, check out the IRS’ second release with details on the new program.
You also can find additional information on the IRS.gov ERC VDP page.
And if you filed an ERC claim, but discovered issues with the filing, consider withdrawing it. That’s a possibility if the if the IRS has not yet processed the tax return with the claim.
So far, the IRS says the claim withdrawal process for unprocessed ERC claims has led to more than 7,300 firms withdrawing $677 million in erroneous claims.
You can find more in my post IRS welcomes voluntary disclosure of dubious ERC claims, as well as at the IRS’ ERC claim withdrawal webpage.
You also might find these items of interest:
- Tips if the IRS audits your business' ERC claim
- 5 new warning signs your ERC claim might be wrong
- 50,000 ERC payments to go out in September, says IRS
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