In late 2023, the IRS launched the Employee Retention Credit Voluntary Disclosure Program (ERC-VDP), the latest effort to prevent future abuse of the program and protect businesses that believe they are not eligible for their claimed (and received) ERC refund.
Are you debating whether your business should participate in this program? Find out more below in our comprehensive breakdown of the new program.
Why should businesses participate in the ERC-VDP?
The ERC-VDP allows businesses to repay ERC monies they do not feel they were eligible to receive. Under this program, businesses are required to repay 80% of their claimed ERC amount and will not be charged penalties or interest for underpayment of employment tax attributable to the ERC.
Additionally, businesses can retain any interest payments they might have received from the IRS on their ERC claim.
Businesses will not be subject to an employment tax audit for ERC claims resolved within the terms of the ERC-VDP.
Who is eligible for this program?
All of the following criteria must be met by any business wishing to participate in the ERC-VDP:
- Business must have ERC, received the credit and have cashed or deposited the refund
- Business must believe they are not eligible for the full amount (both the refundable and nonrefundable portions) of the tax credit in a tax period(s)
- There must not be a need to make any additional (non-ERC related) adjustments or corrections to the employment tax return for the tax period(s) in question
- Businesses cannot be under employment tax examination
- Businesses should not have received a notification that the IRS has (or intends to) reverse their ERC claim to $0
- ERC claims cannot be reversed to $0
- The business must not be under criminal investigation or have been notified that the IRS intends to commence an investigation
- The IRS has not received information about the business’ noncompliance from an enforcement action
- Upon returning the signed ERC-VDP closing agreement, the business must be able to repay the full 80% of credit (unless approved for installment plan)
To find out whether your business is eligible, consult this chart.
What is the effect on Income Tax?
If businesses participate in the ERC-VDP, they will not be required to reduce wage expense with respect to any of the previously claimed ERC. Participants need not file amended returns or Administrative Adjustment Requests (AARs) to reduce wage expense if they had not previously reduced wage expense by any of the claimed ERC.
Suppose a business had previously reduced wage expense by any of the claimed ERC. In that case, participants should not reduce wage expense by any of the claimed ERC if they file an amended return or AAR adjusting the previous reduction to wage expense.
The 20% of the ERC claim a business can retain will not be considered taxable income under the program terms.
A business that resolves its ERC non-compliance through the ERC-VDP does not have to submit an amended employment tax return to correct the ERC claim. The IRS will adjust your account according to the program terms.
How to enroll in the ERC-VDP
Businesses interested in participating in the ERC-VDP should take the following steps:
- Submit Form 15434 Application of Employee Retention Credit Voluntary Disclosure Program to the IRS before the deadline. Form 15434 will walk the applicant through the calculation of the appropriate repayment amount.
- If the business used a preparer or advisor to assist them with any portion of the ERC claim, Form 15434 will request the preparer or advisor’s name and contact information and a description of how they assisted.
- Remit payment of 80% of the ERC claim through the Electronic Federal Tax Payment System (EFTPS). A separate payment should be made for each tax period upon submission of Form 15434.
- Upon receipt of Form 15434, the IRS will prepare a closing agreement and mail it to the business. The business must sign and return to the IRS within ten days of the date of mailing by the IRS. Full payment of the liabilities (80% of the ERC credit) should be made by the date of the executed closing agreement.
The deadline to apply is on March 22, 2024 at 11:59 p.m. local time.
More changes are on the way
Along with the addition of the ERC-VDP, the U.S. House Committee on Ways and Means approved the Tax Relief for American Families and Workers Act, which proposes an early end to the ERC. While taxpayers can claim COVID-related ERC funds until April 15, 2025 under the current law, the recently approved legislation would give taxpayers only until January 31, 2024 to file a claim.
While the legislation was approved by the committee, it has yet to be introduced in the House or Senate for a vote. More information is expected to be announced once the House returns to Washington, D.C. in late January.
If you would like to learn more about this program and the ERC, please review the IRS Frequently Asked Questions or contact your trusted RKL advisor to see if this program is right for you.