IRS announces second ERC voluntary disclosure program

The IRS has announced a second Employee Retention Credit (ERC) voluntary disclosure program (VDP) allowing eligible taxpayers to disclose and repay 85% of 2021 ERC claims. The program expires on Nov. 22, 2024. Additionally, the IRS announced plans to mail upwards of 30,000 “clawback” notices to reverse or recapture improper claims. Taxpayers who have received such notices are rendered ineligible for the second disclosure program and thus interested taxpayers should hastily apply.

Background

The IRS recently announced the launch of a second employee retention credit voluntary disclosure program (the second program. The second program comes roughly five months after the suspension of the first, with the IRS hinting at its arrival since June of this year, albeit with less favorable terms. The first ERC VDP received more than 2,600 applications that disclosed $1.09 billion worth of ERCs, and the IRS likely hopes the second program will have similar, if not better, results and help alleviate the 840,000 to 980,000 claims it recently deemed to have unacceptable levels of risk.

Eligible taxpayers have until Nov. 22, 2024, to apply for the second program, and those accepted must repay 85% of the credits they claimed (up from the 80% that was required under the first program) without interest or penalties in exchange for providing information about any advisors or tax preparers who advised them in pursuing the ERC. The second program is also limited to claims made for tax periods in 2021. Other than the increased repayment percentage and the limitation to 2021 claims, the terms of the second program remain largely the same as the original. However, taxpayers interested in the second program should not wait until the deadline as the IRS will soon be mailing up to 30,000 “clawback” notices, the receipt of which disqualifies taxpayers from participating in the second program.

Key takeaways

• Any taxpayer who has received the ERC for any claims filed in 2021, and has received a credit or refund prior to Aug. 15, 2024, is eligible to participate (including those who have cashed or deposited their refund) so long as:
  1. They are not under criminal investigation, and have not been notified that the IRS intends to begin a criminal investigation,
  2. The IRS has not been alerted to the taxpayer’s noncompliance,
  3. The taxpayer is not under employment tax audit for any tax period for which they are applying for the second program,
  4. The taxpayer has not received a notice and demand for repayment of the ERC for any tax periods covered by the second program,
  5. The taxpayer has not already filed an amended return to eliminate their ERC, and
  6. The taxpayer 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 deadline to apply to the second program is Nov. 22, 2024. Accepted applicants will not pay interest and penalties if they can repay 85% of the credits claimed in full. Taxpayers who cannot repay in full can enter into an installment agreement, though interest and penalties may apply.
• The IRS is discounting the repayment amount by 15% (down from 20% in the original program) to account for the fact that many applicants may have utilized the services of a credit mill firm, and thus had to pay a percentage fee for the credits claimed.
• In exchange for participating in the program, taxpayers must provide the name, address and telephone number of any tax advisor or preparer that assisted them with the claim and describe the services they provided.
• Participating in the settlement eliminates a taxpayer’s eligibility for the ERC, thus, if they had not previously filed an amended return or Administrative Adjustment Request to reduce the deduction for wages on which the credit was claimed, they do not need to do so. The participant will not have income associated with the 15% of the ERC they are allowed to keep.
• Employers who worked with a promoter to claim the credit or otherwise claimed the ERC on shaky grounds for eligibility should be strongly encouraged to consider participating in the VDP. IRS Commissioner Danny Werfel stressed this iteration of the program represents “a final window of opportunity for those misled businesses to make adjustments and avoid future compliance action by the IRS.” As evidenced by information regarding credit mill firms being exchanged for admittance to the program, the IRS is far from done going after fraudulently claimed credits.
• The IRS also announced plans to mail up to 30,000 letters reversing or recapturing improperly paid ERC claims. These “clawback” notices potentially represent more than $1 billion in claims from tax year 2021 and some additional, later-filed tax year 2020 claims. Several thousand of the letters have already been mailed, with more coming in upcoming weeks and into the fall. This is the second round of these letters. As stated above, receipt of these letters disqualifies taxpayers from participating in the second program.

How to proceed

Given the opportunity to repay the credit at a 15% discount, the pervasive nature of the ERC promoter firms’ marketing and the many warnings issued by the IRS against pursuing the credit aggressively, it is possible many taxpayers will pursue the VDP. Baker Tilly can assist with the analysis of whether the program is the right fit for an organization. If the voluntary disclosure program is the best course of action, Baker Tilly has ERC specialists that can assist with preparing and submitting the voluntary disclosure information and working with the IRS to receive a closing letter.

Please reach out to your Baker Tilly advisor regarding how the above may impact your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.