IRS Offers Additional Time to Correct Erroneous, Fraudulent ERC Claims by Joseph Leocata, JD, CPA, MBA
Posted on September 25, 2024
by
Joseph Leocata
The IRS announced in August the reopening of a voluntary disclosure program (VDP) to help taxpayers fix and repay incorrect Employee Retention Tax Credit (ERC) claims without penalties, interest or criminal charges. Congress introduced the ERC in 2020 to provide businesses and nonprofits with economic assistance during the COVID pandemic. The ERC-VDP will run through November 22, 2024.
Background
The ERC is a payroll tax credit for qualifying entities that continued to pay workers during the pandemic despite suffering interruptions to normal operations due to government orders or a significant decline in gross revenue. The law defines a qualifying decline as one in which gross receipts during any quarter between March 13, 2020, and December 31, 2020, are less than 50 percent of gross receipts for the same calendar quarter in 2019. A qualifying decline in gross receipts for any of the first three quarters of 2021 must be less than 80 percent of what they were during the same quarter in 2019 or 2020. The maximum value of the credit for qualifying employers is $5,000 per employee in 2020 and $21,000 per employee ($7,000 per quarter) from January 1, 2021, through Sept. 31, 2021.
The significance and complexity of the ERC created a flood of bad actors and promoters to lure millions of taxpayers into applying for the credit when they did not qualify. Taxpayers that knowingly or unknowingly submitted ineligible ERC claims are at increased risk of IRS audits and well as forced repayments on ERC refunds and credits along with penalties and interest. To stem the tide of false claims, the IRS stepped up its compliance efforts, issuing a moratorium on processing new claims in the Fall of 2023 and introducing a six-month VDP at the end of the year that the agency says resulted in more than 2,600 disclosure applications and protected more than $1 billion in federal funds. In September 2024, the IRS adjusted its moratorium and began processing claims filed after September 14, 2023; the moratorium in claims filed before January 31, 2024, is still in effect. At the same time, the agency began sending rejection letters to 30,000 taxpayers with an estimated $5 billion in improper ERC claims.
Second ERC Voluntary Disclosure Program
Taxpayers that claimed and received an ERC they now do not believe they were entitled to for any tax period in 2021 may qualify for the VDP between now and November 22, 2024, when they meet the following criteria:
- The IRS processed their claim and issued a refund before August 15, 2024, that they have since cashed, deposited or paid in the form of a credit applied to the tax period or another tax period.
- They have not reversed their ERC to $0. For example, if a taxpayer previously filed an amended employment tax return to eliminate all its ERCs, it is not eligible for the second ERC-VDP for the period(s) you amended.
- They are not under employment tax examination (audit) by the IRS
- They are not under criminal investigation by the IRS
- The IRS has not reversed or notified them of its intent to reverse all or part of their ERC. For instance, if they received a notice or letter from the IRS disallowing the ERC, they are not eligible for the VDP.
However, if the taxpayer used a third-party payer, such as a professional employer organization (PEO), to claim the ERC or file their employment tax returns, they must contact that party to apply for the VDP.
Applying for the second ERC-VDP enables taxpayers to pay back the money they received in error, resolve their civil tax liabilities and avoid potential IRS audits and litigation, penalties and interest. In doing so, they must agree to repay 85 percent of the ERC received as a refund or credit on their tax return by the time they return a signed VDP closing agreement to the IRS. This means employers may retain 15 percent of their claimed credit, which should help them recoup the fees charged by promoters. However, the IRS will not treat this reduction as taxable income.
Other Options
Taxpayers that filed ERC claims on an adjusted employment tax form that the IRS has not yet processed may have an opportunity to withdraw their initial claims by sending the IRS an adjusted employment tax return. To be eligible for the withdrawal program, the taxpayer must not have received, deposited or cashed an ERC refund.
By contrast, if an employer receives a rejection from the IRS and disagrees with the agency, it may request an administrative appeal with the Independent Office of Appeals within two years days from the date of the notice of claim disallowance. It is important to remember that the success of an appeal depends on the taxpayer’s ability to demonstrate and prove that the IRS misinterpreted the law, applied it incorrectly to the employer’s unique facts and circumstances, or relied on incorrect information. If an employer disagrees with the Independent Office of Appeals’ determination upon review of the appeal or wants to forgo filing an appeal, it may file suit in the U.S. District Court or the U.S. Court of Federal Claims within two years of receiving the notice of claim disallowance.
About the Author: Joseph Leocata, JD, CPA, MBA, is a senior manager of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with individuals and businesses on a broad range of federal, state and local tax issues, including representation before the IRS on tax controversy matters. He can be reached at the CPA firm’s New York City office at (646) 213-7600 or info@bpbcpa.com.
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