The Employee Retention Tax Credit (ERTC) was introduced in 2021 when many businesses were forced to close due to the COVID-19 virus. This credit provided cash to enable struggling businesses retain employees, and although the ERTC expired for most employers at the end of the Q3 2021, it could still be claimed on amended returns this year.
According to the IRS, it began receiving a deluge of “questionable” ERTC claims as some unscrupulous promotors asserted that large tax refunds could easily be obtained — even though there are stringent eligibility requirements. “We saw aggressive marketing around this credit, and well-intentioned businesses were misled into filing claims,” explained IRS Commissioner Danny Werfel. Thus, last year, in a series of actions, the IRS began cracking down on potentially fraudulent claims. A moratorium was put in place for processing new ERTC claims submitted after September 14, 2023. Despite this, the IRS reports that it still has more than $1 billion in ETRC claims in process and they are receiving additional scrutiny.
So, this brings us to the purpose of this article. If you are planning to submit a ERTC claim, here are two programs you should be familiar with.
Voluntary Disclosure Program
This program is a provision introduced by the IRS in response to businesses inadvertently claiming the ERTC while they were ineligible or incorrectly calculating the credit amount. The program was designed to encourage businesses to come forward and correct any errors or inaccuracies in their previous ERTC claims. By voluntarily disclosing these mistakes, businesses could avoid potential penalties and legal consequences.
The Voluntary Disclosure Program is available to businesses that had claimed the ERTC but later realized they were ineligible or had made errors in calculating the credit amount. To participate, businesses will need to outline the nature of the error, the tax periods affected, and the steps taken to correct the mistake in a written disclosure by March 22, 2024. The name, address, and phone number of anyone who advised or assisted them with their claim will need to be submitted as well.
Once the disclosure is submitted, the IRS will review the information provided and work with the business to correct any inaccuracies. This may involve adjusting previous tax returns or taking other appropriate measures to rectify the situation. By participating in the ERTC Voluntary Disclosure Program, businesses will potentially avoid penalties and interest charges that might otherwise be imposed for erroneous ERTC claims.
If the IRS accepts a business into the program, the employer will need to repay only 80% of the credit money it received (any interest paid by the IRS on the credit will be forgiven). Employers that are unable to repay the required 80% may be considered for an installment agreement on a case-by-case basis, pending submission and review of an IRS form that requires disclosing a significant amount of financial information.
Special Withdrawal Program
If a business has a pending claim for which it has eligibility concerns, it can withdraw the claim. This program is also available to businesses that were paid money from the IRS for claims but haven’t cashed or deposited the refund checks. The tax agency reported that more than $167 million from pending applications had been withdrawn through mid-January.
Commissioner Werfel has said the disclosure program “provides a much-needed option for employers who were pulled into these claims and now realize they shouldn’t have applied.” In addition to the programs described above, the IRS has begun sending letters to thousands of taxpayers notifying them their claims have been disallowed. These cases involve entities that didn’t exist or didn’t have employees on the payroll during the eligibility period, “meaning the businesses failed to meet the basic criteria” for the credit.
Another set of letters will soon be mailed to credit recipients who claimed an erroneous or excessive credit. They’ll be informed that the IRS will recapture the payments through normal collection procedures.
Interested in enrolling in the Voluntary Disclosure Program or the Special Withdrawal Program, contact your VAAS Pro consultant to ensure you take the appropriate steps for enrollment.
Received a letter from the IRS, discuss with your tax consultant to plan of response.