For businesses that kept their employees on payroll even while struggling to stay afloat during the COVID-19 pandemic, the Employee Retention Credit (ERC) can help them even as they continue to recover from a decline in business. However, some ERC companies led businesses to believe that they were entitled to the credit when in fact they were not. If a business does not qualify for the ERC based on a decline in its gross receipts it must be able to show that its operations were at least partially suspended by a government order. Contrary to the advice of some companies, a stay-at-home order, a loss in customers, or a general economic downturn in and of themselves do not qualify. You must be able to show how a specific government order affected your business. For instance, government orders that limited the number of people who could dine in a restaurant directly limited the restaurant’s operations.
Some businesses received an ERC check but now no longer believe their claim qualifies for the program. If these businesses are audited by the IRS and the IRS finds that they do not qualify for the ERC, they will have to pay back the full amount of the credit to the IRS as well as interest and penalties. If the IRS finds that their error was the result of negligence or disregard of tax rules, they also face a 20-percent negligence penalty. To encourage these businesses to come forward and pay back the wrongfully claimed ERC, the IRS has created the Employee Retention Credit Voluntary Disclosure Program (ERC-VDP). This article will explain the ERC-VDP application process, eligibility criteria, and the benefits of participating in this program.
The ERC-VDP is only open through March 22, 2024. It offers businesses a structured pathway to repay ERC refunds to which they were not entitled. To participate, businesses are required to voluntarily repay the ERC, cooperate with IRS requests for additional information, and sign a closing agreement. The ERC-VDP allows businesses an opportunity to correct inadvertent errors, lessen tax obligations, and even keep some of the money they received from the ERC program.
Eligibility for ERC-VDP
Businesses, tax-exempt organizations, and government entities are eligible to apply for the ERC-VDP if they meet specific requirements. These include having received a refund for the claimed ERC, realizing that they are entitled to no ERC, not being under IRS employment tax examination or criminal investigation, and not receiving a notice of intent to reverse the ERC.
Businesses who employed third-party payers to file employment tax returns or claim ERC on their behalf must contact the payer to apply for ERC-VDP.
Advantages of ERC-VDP
Businesses are only required to repay 80% of the claimed Employee Retention Credit (ERC) – which can help alleviate a substantial financial burden. In addition, businesses do not have to reimburse the IRS for any interest received on the ERC refund. Businesses also do not have to amend income tax returns to reduce wage expense deductions even though the ERC partially reimburses them for the wage expenses. The 20% reduction in the ERC amount is considered non-taxable income, and the IRS further supports businesses by waiving penalties and interest if the full ERC-VDP amount is paid by the signed closing agreement deadline.
How to Apply?
Businesses that qualify for the Employee Retention Credit Voluntary Disclosure Program can apply by filling out an application form. If the application includes periods in 2020 you also must also submit a Consent to Extend the Time to Assess Employment Taxes. You must have an authorized person sign the application and submit the application using the IRS Document Upload Tool by March 22, 2024. If a business can’t pay the full amount, it can request an installment agreement. More information can be found at the IRS’ website.
Upon submission, the IRS will review the application package and notify the business of its eligibility. If approved, the IRS will mail a closing agreement, and the business must pay the full ERC-VDP amount. Once the signed closing agreement is returned, the IRS will adjust the account accordingly.
If rejected, the IRS will provide reasons for rejection, allowing businesses to correct errors and resubmit or file an amended employment tax return.
The ERC-VDP is an important program that helps businesses fix mistakes they made when claiming the Employee Retention Credit. It makes it easier for businesses to follow the rules and avoid the potential penalties and interest of an IRS audit. Businesses must apply to use this program before March 22, 2024. If you are a business owner and your business claimed the ERC, but you think you may not have been entitled to it, contact our office. We can help you assess your ERC eligibility and if necessary, help you navigate the ERC-VDP program.
Robert V. Boeshaar Attorney at Law, LL.M.,PLLC
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