October 15, 2024
Tax

IRS Reopens Voluntary Disclosure For ERC Through November


The IRS announced this week that a special Voluntary Disclosure Program will reopen, allowing businesses that claimed the Employee Retention Credit (ERC) to withdraw their claims and repay part of the credit received. The IRS announcement included a carrot and a stick. The carrot: a promise of closure for businesses and business owners who claimed the credit and are now lying awake at night worried about whether they are included in the 460 ERC cases the IRS is criminally investigating, together with a promise that the business can keep some portion of the credit. The stick: over 30,000 “recapture” letters are hitting the post office this fall, altering taxpayers that the IRS will reverse so-called “improperly paid” ERC claims. This article focuses on the carrot and the details of the disclosure program.

ERC Voluntary Disclosure Program (Redux) – The Details

The program is set to run through Nov. 22 and looks to entice potential participants with a 15% discount – meaning taxpayers need only repay 85% of their original claim should they be accepted into the program. The IRS has had success with the ERC VDP, most recently processing more than 2,600 applications worth more than $1 billion from the version of the program that ended in March 2024.

The tax professionals who have been on the front line of defending the ERC claims submitted welcome the program, but note it isn’t perfect.

Plante Moran’s Senior Manager Jennifer Keegan expects a high rate of participation in the second program. “I expect we will see meaningful participation in the second round VDP,” Keegan explained. “Many taxpayers who would have participated in the first round missed the application window because they were unaware of the existence of the program before the brief application window closed. The second round VDP is only open until November 22, so taxpayers who have doubts about their qualification for ERC should consult with an attorney or trusted tax advisor as soon as possible to determine whether participation in the VDP is right for them. Although the program does not offer all the same benefits as the first round, taxpayers who are not qualified for ERC can significantly reduce the cost of returning ERC funds by participating in the program.”

RSM’s Tax Controversy Leader Alina Solodchikova agrees, noting “It is a good practice to have ERC claims reviewed by trusted tax advisers. If it is determined that an ERC claim was not a valid claim, the second VDP program still allows taxpayers to come forward and pay 85% of the refund received, penalty and interest free. The IRS is saying that there were 2600 participants in the first VDP program that was open for all ERC tax periods. This second program is available only for Q1 and Q2 2021 filings. We expect that for this reason there will be less participants in the second VDP program.” Withum Partner Dan Mayo agrees that the participation won’t be as robust, because according to Mayo, “most people already made a decision on whether to participate.”

Participation Requirements

Not every business that submitted an ERC claim can participate in the Disclosure Program. The IRS didn’t release criteria describing who can participate – instead, it released the disqualification criteria. According to the IRS, any employer who already received the ERC for a tax period in 2021 for which they weren’t entitled can apply if the following are also true:

  • The employer hasn’t already applied to the first ERC VDP for the same tax periods. The IRS is still processing VDP applications from the first program. Taxpayers should not reapply for the same periods.
  • The employer isn’t under criminal investigation.
  • The employer isn’t under an IRS employment tax examination for the tax period for which they’re applying to the VDP.
  • The employer hasn’t received a Letter 6577-C, Employee Retention Credit (ERC) Recapture, or an IRS notice and demand for repayment of part or all of its ERC claim.
  • The employer hasn’t already filed an amended return to eliminate their ERC.
  • The IRS hasn’t received information from a third party or directly from an enforcement action that the taxpayer is not in compliance.

How to Determine if you qualify?

Taxpayers should not engage in self-help here. Each one of the tax professionals quoted above stressed the importance of seeking help from a qualified tax professional who does this for a living.

Although taxpayers who are under criminal investigation are informed about it at some point, it is not done until significant work has been done in the investigation. When clients come to me because they are under criminal investigation, it is usually because a special agent has knocked on their door and either interviewed them or attempted to do so. That only happens after the special agent has done a lot of work and knows exactly what they want to ask the taxpayer. So how is someone supposed to know if they are under criminal investigation? Again, contact a tax professional. It is critically important that anyone who has a reasonable fear of criminal prosecution contact an attorney, because any communications to a tax accountant are not protected by attorney-client privilege. For 99% of those taxpayers who are wondering whether to participate in the ERC VDP, this should not be a problem.

Application Process

To apply, employers must file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program PDF, available on IRS.gov, and submit it through the IRS Document Upload Tool. Employers are expected to repay their full ERC, minus the 15% reduction allowed through the VDP. Under certain conditions, employers who aren’t able to pay the amount in full will have the option to set up an installment agreement. This is not as easy as it seems. It took me hours to try to get the form to work, even after asking my IT guy for help. The IRS should make these forms more accessible.

The form asks for information about the claim being withdrawn, information about any preparer or advisor who prepared the initial ERC claim. There is also a consent to extend the statute of limitations, which will be needed to effectuate any change to the original claim.

Roadblocks

According to the IRS rules, “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.” Some taxpayers may want to withdraw but run into resistance from third parties who filed the claim. Those taxpayers should contact an attorney as well.

Traps for the Unwary

The VDP form requires signature of the taxpayer and the representative under penalties of perjury. While it is possible there are other IRS forms that require the representative to sign under penalties of perjury, I have not seen one I can recall in my entire 15+ year career representing taxpayers before the IRS and against the IRS in United States Tax Court or Federal Courts. When taxpayers file a protest and invoke their right to review from the IRS Independent Office of Appeals, they have to include a declaration:

Under penalties of perjury, I declare that I have examined the statement of facts presented in this protest and in any accompanying schedules and statements and, to the best of my knowledge and belief, it is true, correct, and complete.

And if the protest is signed by the representative, the representative must include a substitute declaration stating:

  1. That the representative prepared the protest and accompanying documents; and
  2. Whether the representative knows personally that the statements of fact contained in the protest and accompanying documents are true and correct.

Typically I include something that says, “to the best of my knowledge and believe, the facts are true and correct.”

Conversely, in this VDP form, the IRS requires the taxpayer and the representative to sign under penalties of perjury. The taxpayer signs:

Under penalties of perjury, I declare that I have examined this submission, including any accompanying documents, and to the best of my knowledge and belief, all of the facts contained herein are true, correct, and complete.

The representative must sign:

Under penalties of perjury, I declare that I have examined this submission, including any accompanying documents, and to the best of my knowledge and belief, all of the facts contained herein are true, correct, and complete. Declaration of representative is based on all information of which representative has any knowledge.

Fortunately, the form does not require any affirmative statement regarding why the taxpayer is participating in the VDP or whether the initial claim was fraudulently prepared. The December 2023 version of Form 15434 also required the same statements under penalty of perjury from both the taxpayer and the representative.



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