The ERC Voluntary Disclosure Program has reopened, allowing taxpayers another opportunity to participate. Our tax controversy specialists walk through what taxpayers can consider and how they should plan for this new employee retention credit development.
On July 26, 2024, the IRS announced that it intends to reopen the employee retention credit (ERC) Voluntary Disclosure Program (VDP), which was previously available for approximately 90 days, and closed on March 22, 2024. On August 15, 2024, the IRS released the details for the reopened program, which will be available to taxpayers until November 22, 2024. The reopening of the program comes at a time when many taxpayers are receiving ERC denial letters as a result of the IRS’ sharp increase in enforcement efforts. Now is the time for taxpayers with ERC claims to take a second look at their qualifications and become familiar with their options if they receive a denial letter.
What happened with the employee retention credit (ERC)?
Since the ERC was enacted in 2020 as part of a series of COVID-19 relief legislation, misinformation and aggressive marketing by ERC promoters has resulted in billions of dollars of ERC claims that the IRS says are unqualified or fraudulent. In response to the growing severity of this problem, the IRS announced on Sept. 14, 2023, that it was imposing an unprecedented moratorium on processing all ERC claims filed after that date, and the moratorium remains in place as of the IRS’ July 26, 2024, announcement. On Dec. 21, 2023, the IRS announced the opening of the VDP, which allowed taxpayers with erroneous ERC claims to return 80% of the ERC funds and avoid costly interest and penalties by participating. The application window closed on March 22, 2024, after giving taxpayers approximately 90 days to evaluate their eligibility and apply for the VDP. To complicate matters, the VDP was open during a time when many taxpayers and tax preparers were focused on filing 2023 income tax returns.
Taxpayers who wanted to participate in the VDP but missed the application window will welcome the reopening of the VDP and the opportunity for cost saving when returning ERC funds.
Taxpayers who wanted to participate in the VDP but missed the application window will welcome the reopening of the VDP and the opportunity for cost saving when returning ERC funds.
What are the details of the reopened ERC Voluntary Disclosure Program (VDP)?
Taxpayers who wish to participate in the reopened VDP need to meet the same qualification criteria as the original program, and they must have received their ERC benefit prior to August 15, 2024. The program offers taxpayers the opportunity to retain 15% of the ERC and avoid paying interest and penalties. Additionally, the reopened VDP offers some of the valuable benefits that were available in the original VDP, including allowing taxpayers to exclude from taxable income the 15% of the ERC they retain and allowing taxpayers to forgo adjusting the wage expense reported on their income tax returns, which is normally required for recipients of ERC.
There are many factors to consider when deciding whether to enroll in any Voluntary Disclosure Program. Taxpayers who are considering enrolling should consult with a trusted tax advisor as soon as possible, as applications must be submitted by November 22, 2024.
Evaluating your employee retention credit risk
The July 26 announcement reiterated the importance of taxpayers conducting a thorough review of their ERC claims for red flags, including a list of 12 situations that should signal taxpayers to take a closer look at their qualifications. Some of the most significant factors include:
Claiming too many quarters. The ERC eligibility criteria is complex and easily impacted by changes in a taxpayer’s circumstances. It was uncommon for a taxpayer in 2020 or 2021 to have qualifying circumstances in every quarter that the ERC was made available.
Large employers claiming wages for employees who provided services. Large employers (those with over 100 full-time employees in 2020 or 500 full-time employees in 2021) could only claim wages paid to employees who didn’t provide services.
Relying on government orders that don’t qualify. There’s a lot of misinformation about what orders are considered qualifying orders for ERC. For example, many taxpayers believed that Occupational Safety and Health Administration (OSHA) regulations constitute a qualifying government order, but rules that were in place prior to COVID-19 — like OSHA regulations — don’t qualify. Similarly, orders must directly apply to the taxpayer’s business to qualify them for ERC, and they can’t rely on orders that only restricted their employees or customers.
Relying on supply chain disruption. Qualifying for the ERC based on supply chain disruption is extremely rare, and most taxpayers won’t qualify on this basis. Difficulties in obtaining raw materials or products for resale and increased prices don’t establish eligibility based upon a qualifying supply chain disruption.
A promoter told them they have nothing to lose. Taxpayers who relied on a promoter to help them apply for ERC should be very cautious if the promoter told them that there is no risk to applying or they have “nothing to lose.” Taxpayers who file erroneous ERC claims risk repayment of their refunds, incurring interest, and having to pay costly penalties.
The IRS urges taxpayers who have doubts about their claims to consult with a trusted tax professional that understands the complex ERC rules.
The IRS urges taxpayers who have doubts about their claims to consult with a trusted tax professional that understands the complex ERC rules.
What are your options if your ERC refund claim is denied?
Taxpayers can often appeal a denial of their ERC refund claim through the IRS Independent Office of Appeals. An effective appeal requires significant preparation, strategy, and building strong arguments to present at your appeals hearing. The process for completing an appeal can take a year or more, so it’s not a quick solution. Taxpayers who are considering an appeal of their ERC denial should consult with an experienced tax controversy practitioner about the best strategy for their case.
Taxpayers may also have the option to file a lawsuit in tax court, U.S. District Court, or the Court of Federal Claims, depending on their circumstances. Taxpayers can file a lawsuit as an alternative to filing an appeal, or they can file suit after an appeal didn’t result in a favorable outcome. Those considering filing a lawsuit should consult with an attorney as early in the process as practical to discuss the options available to them.
What should you do now?
The ERC is a complex credit, and there’s a lot of misinformation in the public sphere. Taxpayers who have doubts about their ERC claims or have received a denial of their ERC claim should consult with a knowledgeable expert regarding their options. When the renewed VDP reopens, it’s likely to be available for a short time, so taxpayers should be prepared to act fast. Our tax controversy team has extensive experience representing taxpayers in connection with ERC claims and can help you navigate your strategies and options.
