The IRS will reopen its voluntary disclosure program (VDP), allowing businesses to correct questionable employee retention credit (ERC) claims at a discount (Announcement 2024-30).
The revised VDP, which will end Nov. 22, allows businesses to repay improper ERC credit amounts, less a 15% discount, and allows them to avoid future audits, penalties, and interest, the IRS said Thursday in a news release. The terms are not as favorable as the first VDP, which included a 20% discount. That VDP, which ended in March, resulted in over 2,600 applications from ERC recipients with disclosures totaling $1.09 billion in credits.
The IRS will not charge program participants' interest or penalties on any credits they repay on time. However, if employers cannot repay the required 85% of the credit at the time they sign the closing agreement, they will be required enter an alternative payment arrangement such as an installment agreement and may be required to pay penalties and interest in connection with that payment arrangement.
The Service also said Thursday that it plans to mail up to 30,000 new letters to reverse or recapture potentially more than $1 billion in improper ERC claims. Thousands more mailings on additional questionable payments will be made in the fall, the release said.
VDP participation "is especially important given increasing IRS compliance actions involving bad claims," Commissioner Danny Werfel said in the release. "[M]any of them are the result of aggressive marketing tactics to lure unsuspecting businesses into claiming the complex credit. This provides a final window of opportunity for those misled businesses to make adjustments and avoid future compliance action by the IRS."
To qualify for the VDP, employers must provide the IRS with names, addresses, telephone numbers, and details about the services provided by any advisers or tax preparers who advised or assisted them with ERC claims. The reopened VDP applies only to ERC claims from 2021; taxpayers cannot use the VDP to disclose and repay ERC payments from 2020.
The IRS has said repeatedly that unscrupulous promoters are behind many of the questionable ERC claims.
Background on the ERC
The ERC was designed to help certain businesses continue paying employees during the COVID-19 pandemic while their operations were either fully or partially suspended due to a government order or had a significant decline in gross receipts during the eligibility periods. It was generally available to eligible businesses from March 31, 2020, to Sept. 30, 2021, and to Dec. 31, 2021, for recovery startup businesses.
Recapture letters
The 30,000 recapture letters the IRS plans to send potentially represent more than $1 billion in claims from tax year 2021 and some additional, later-filed tax year 2020 claims, the IRS said.
Those who receive these recapture letters will be ineligible to participate in the VDP for the calendar quarter the letter covers.
The latest letters generally involve larger claims than earlier round of letters regarding 2020 ERC claims, the IRS said, because Congress increased the maximum ERC in 2021. Congress increased the maximum ERC from $5,000 per employee per year in 2020 to $7,000 per employee for each quarter of the year in 2021.
Claim withdrawal program
The IRS also has a separate ERC claim withdrawal program that allows employers with pending, unpaid ERC claims to remove an ERC claim that the IRS has not yet processed. They can withdraw the claim and pay no interest or penalty. Already, the claim withdrawal process for those with unprocessed ERC claims has resulted in more than 7,300 entities' withdrawing $677 million in claims.
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