As reported via IR-2023-247 on 12/21/2023

As part of an ongoing initiative aimed at combating dubious Employee Retention Tax Credit (ERTC) claims, the Internal Revenue Service launched a new Voluntary Disclosure Program to help businesses who want to pay back the money they received after filing ERTC claims in error.

The new disclosure program, which has been in the works for several months, is part of a larger effort at the IRS to stop aggressive marketing around ERTC that misled some employers into filing claims. The special disclosure program runs through March 22, 2024, and the IRS added provisions allowing repayment of 80% of the claim received.

The IRS also continues to urge employers with pending ERTC claims to consider a separate withdrawal program that allows them to remove a pending ERTC claim with no interest or penalty. The IRS has already received more than $100 million in withdrawals as the agency continues intensifying audits and criminal investigation work in this area.

As these special initiatives for ERTC continue, the IRS will provide an update in the new year on the status of the moratorium. Additionally, the IRS mailed out 20,000 denial letters to ERTC claimants earlier this month.

“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. “From discussions we have had with taxpayers and tax professionals around the country, 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. This new option, with an opportunity to get right with a lower financial cost, provides the relief these taxpayers requested. The new initiative will also help with our ongoing efforts to gather information on promoters who created this situation by aggressively pushing people to apply for the credit.”

Interested employers must apply to the ERTC Voluntary Disclosure Program by March 22, 2024. Those that the IRS accepts into the program will need to repay only 80% of the credit they received. If the IRS paid interest on the employer’s ERTC refund claim, the employer doesn’t need to repay that interest. Employers who are unable to repay the required 80% of the credit may be considered for an installment agreement on a case-by-case basis, pending submission and review of a Form 433-B, Collection Information Statement for Businesses, available on IRS.gov, and all required supporting documentation.

The IRS will not charge program participants interest or penalties on any credits they repay. However, if the employer is unable to repay the required 80% of the credit at the time of signing their closing agreement, then the employer will be required to pay penalties and interest in connection with entering into an installment agreement.

The IRS selected an 80% repayment because many of the ERTC 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.

To qualify for this program, 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 the services provided. Further qualifications and program details are in Announcement 2024-3.

As part of this expanding effort for employers that claimed an erroneous or excessive ERTC, the IRS also announced today it has started sending up to 20,000 letters with proposed tax adjustments that will recapture the erroneously claimed ERC. These mailings – which are on top of the 20,000 denial letters announced earlier in December – are currently just for tax year 2020, and work continues for tax year 2021, with additional mailings planned. If the IRS identifies an employer that has received excessive or erroneous ERTC, the agency will reclaim that ERTC through normal tax assessment and collection procedures.

“These letters are another incentive for businesses that believe they received an erroneous Employee Retention Tax Credit payment to come forward and participate in the disclosure program,” Werfel said. “Our compliance activities involving these payments continue to accelerate, and the disclosure program’s 80% repayment figure is much more generous than later IRS action, which includes steeper costs and greater risk. We hope these taxpayers take advantage of this window now.”

ERTC Voluntary Disclosure Program: Who can apply?

A variety of ERTC recipients can apply. Any employer who already received the ERTC for a tax period but isn’t entitled to it can apply if the following are also true:

• The employer is not under criminal investigation and has not been notified that they are under criminal investigation.
• The employer is not under an IRS employment tax examination for the tax period for which they’re applying to the Voluntary Disclosure Program.
• The employer has not received an IRS notice and demand for repayment of part or all of the ERTC.
• The IRS has not received information from a third party that the taxpayer is not in compliance or has not acquired information directly related to the noncompliance from an enforcement action.

How to apply

To apply, the employer must first file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program. This form must be submitted using the IRS Document Upload Tool. Employers will be expected to repay their full ERTC, minus the 20% reduction allowed through the Voluntary Disclosure Program. Employers who are not able to pay the amount in full will have the option to set up an installment agreement under certain conditions.

Employers who outsource their payroll must apply through the third party

Many employers outsource their payroll obligations to a third party who reports, collects and pays employment taxes on the employer’s behalf using the third party’s Employer Identification Number. In this situation, the third party, not the employer, must file Form 15434. See the form and its instructions for details.

Help options for those considering applying

As part of a larger set of information on ERTC, the IRS has provided a set of frequently asked questions to help employers understand the terms of the program.

Once the employer has applied to the program and submitted their Form 15434, an IRS employee will contact them to go over the application and answer any questions.

Next steps after an application is approved

If the IRS approves the employer’s application, they will mail the employer a closing agreement. The employer must then repay 80% of the ERTC they received, either online or by phone, using the Electronic Federal Tax Payment System (EFTPS). EFTPS is the Treasury Department system that most businesses already use to pay various federal tax obligations.

If the taxpayer is unable to pay the amount in full, they may enter into an installment agreement with the IRS to pay over time. However, under the standard installment agreement policy, penalties and interest will apply, so the IRS encourages those who cannot pay in full to consider obtaining a loan from a financial institution to avoid the costs of an installment agreement with the IRS. Once payment has been made, the employer must return the signed closing agreement to the IRS.

Ongoing ERTC initiatives

The new Voluntary Disclosure Program is just the latest step taken by the IRS in its ongoing fight against ERTC fraud.

• In July, the IRS said it was shifting its focus to review ERTC claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims. The IRS has hundreds of criminal cases being worked, and thousands of ERTC claims have been referred for audit.
• Following concerns about aggressive ERTC marketing from tax professionals and others, the IRS announced Sept. 14 a moratorium on processing new ERC claims. Enhanced compliance reviews of existing claims submitted before the moratorium is critical to protect against fraud and also to protect businesses and organizations from facing penalties or interest payments stemming from bad claims pushed by promoters.
• Then, earlier this month, the IRS began sending an initial round of more than 20,000 letters to employers disallowing their ERTC claims either because their business did not exist, or they didn’t have employees for the period covered by their claim.
• As mentioned earlier, the IRS also announced today it has started sending letters to up to 20,000 employers that claimed an erroneous or excessive ERTC that propose tax adjustments that will remove the ERTC.
• In addition to these efforts, IRS audit and Criminal Investigation work involving ERTC continues to expand involving dubious claims. The IRS has more than 300 criminal cases being worked with claims worth almost $3 billion, and thousands of ERTC claims have been referred for audit.

More Information

For more information on ERTC eligibility, see the ERTC frequently asked questions and the ERTC Eligibility Checklist, which is available as an interactive tool or as a printable guide.

(This is Blog Post #1513)