IRS Reopens Voluntary Disclosure Program For Errant Employee Retention Credit Claims

IRS Reopens Voluntary Disclosure Program For Errant Employee Retention Credit Claims blog image

Washington, D.C. (August 15, 2024)

The Internal Revenue Service (IRS) has announced a limited-time reopening of its Voluntary Disclosure Program to help businesses rectify incorrect Employee Retention Credit (ERC) claims. This initiative comes as the IRS intensifies its compliance efforts to address over $1 billion in erroneous claims.

Second Chance to Self-Correct

The ERC Voluntary Disclosure Program, available until November 22, offers businesses a chance to correct improper payments at a 15% discount and avoid future audits, penalties, and interest. This follows a successful first program that resulted in over 2,600 applications and the disclosure of $1.09 billion in questionable credits.

Increased Scrutiny and Recapture Efforts

To emphasize the importance of participating in the program, the IRS plans to send up to 30,000 letters to address potentially more than $1 billion in improper ERC claims. Thousands more mailings will be sent in the fall to target additional questionable payments.

Commissioner Werfel's Statement

IRS Commissioner Danny Werfel urged businesses with incorrect claims to take advantage of this opportunity: “The reopening of the Voluntary Disclosure Program provides a final window of opportunity for those misled businesses to make adjustments and avoid future compliance action by the IRS.” He highlighted the aggressive marketing tactics employed by some promoters that led to a surge in questionable claims, clogging the IRS system and slowing down legitimate processing.

Ongoing Compliance Efforts

In addition to the reopened program, the IRS has taken several other steps to address ERC claims, including:

  • Disallowance letters: Sending 28,000 letters to businesses with high-risk claims, potentially preventing up to $5 billion in improper payments.
  • Processing prioritization: Identifying and processing 50,000 valid ERC claims.
  • Criminal investigations: Initiating 460 criminal cases related to fraudulent ERC claims, resulting in 37 federal charges and 17 convictions.

Understanding the ERC

The ERC was a federal tax credit designed to help businesses keep employees on payroll during the COVID-19 pandemic. Businesses that qualified for the credit could receive up to $5,000 per employee per quarter in tax credits. However, the program was subject to a number of eligibility requirements, and many businesses may have claimed the credit incorrectly.

Common Mistakes Made by Businesses

Some common mistakes made by businesses when claiming the ERC include:

  • Overstating eligibility: Businesses may have claimed the credit for employees who were not eligible, such as those who were not full-time employees or who continued to work during the pandemic.
  • Incorrectly calculating the credit: Businesses may have calculated the credit incorrectly, resulting in overpayments.
  • Failing to meet the revenue test: The ERC was only available to businesses that experienced a significant decline in gross receipts during the pandemic. Businesses that did not meet this test may have claimed the credit improperly.

Consequences of Incorrect ERC Claims

Businesses that have claimed the ERC incorrectly may face a number of consequences, including:

  • Recapture of payments: The IRS may recapture any ERC payments that were made in error.
  • Penalties and interest: Businesses may be subject to penalties and interest if they have knowingly claimed the ERC incorrectly.
  • Audits: The IRS may conduct audits of businesses that are suspected of claiming the ERC improperly.

How to Avoid ERC Mistakes

To avoid making mistakes when claiming the ERC, businesses should:

  • Understand the eligibility requirements: Businesses should carefully review the eligibility requirements for the ERC to ensure that they meet all of the criteria.
  • Keep accurate records: Businesses should keep accurate records of their payroll expenses and revenue during the pandemic.
  • Seek professional advice: Businesses may want to consult with a tax professional to ensure that they are claiming the ERC correctly.

Key Points for Businesses

  • Review eligibility: Businesses with questionable claims should review eligibility requirements and consult with a tax professional.
  • Act promptly: Participating in the disclosure program before November 22 can help avoid future audits, penalties, and interest.
  • Be aware of recapture letters: Businesses receiving recapture letters are ineligible for the program.
  • Consider the claim withdrawal program: Businesses with pending claims can withdraw them to avoid interest and penalties.

By taking advantage of the reopened Voluntary Disclosure Program and addressing any errors in their ERC claims, businesses can protect themselves from costly compliance actions and ensure their compliance with IRS regulations.

Conclusion

The IRS is sending a clear message to businesses that have improperly claimed the ERC: the days of easy money are over. By taking a more aggressive approach to enforcement, the IRS aims to recover billions of dollars in lost revenue and deter future fraudulent claims. Businesses that have received erroneous ERC payments should take advantage of the voluntary disclosure program or face the consequences of IRS scrutiny.

To learn more about how you can reduce your taxes and save money, check out the helpful resources on our blog or contact us today to schedule a consultation.

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