New IRS Voluntary disclosure program for employee retention credit

On August 15, 2024, the IRS introduced a second voluntary disclosure agreement (VDA) program targeting companies that have claimed the employee retention credit (ERC) as provided by the CARES Act. Businesses that may have received ERC refunds based on improper claims should consider participating in this VDA program before the IRS identifies the erroneous refunds.

Background

The ERC, a tax credit established during the pandemic, applied to wages paid from March 13, 2020, to September 30, 2021, provided that certain conditions were met. These conditions included a full or partial suspension of business operations due to a government order related to COVID-19 or a significant decline in gross receipts. The maximum credit available—assuming compliance with all eligibility requirements—was $26,000 per employee. However, numerous businesses applied for the ERC even though they may not have qualified for some or all of the credit. The IRS has since determined that the majority of pending ERC claims were improper and has signaled that many companies that have already received ERC refunds may have done so based on improper claims.

This determination led to the August 15 announcement of a second VDA program, which follows an earlier program that concluded on March 22, 2024. The IRS has limited the current VDA program to ERC claims related to wages paid in 2021, excluding claims related to 2020 wages. Moreover, the program does not cover any claims that might be deemed criminal. In cases involving fraudulent ERC claims, the company must engage with the IRS Criminal Investigation Voluntary Disclosure Practice.

Benefits of Entering This Second VDA Program

The new VDA program offers several benefits:

• The company may retain 15% of the ERC refund it received, meaning 85% of the ERC must be repaid. (The 85% that must be returned is based on the total ERC amount, not the net amount received after any fees paid to a consulting firm or tax advisor who may have charged a percentage of the refund as a fee.)
• The company is not required to report as income the 15% it may retain.
• The company may keep any interest it received on the ERC refund, provided that it repays the required 85% of the refund.
• The company is not obligated to file an amended income tax return to reduce deductions by the amount of the ERC for the year in which the credit was claimed.
• The company may file another amended return to reinstate the deduction for wages paid if it has already filed an amended return to reduce deductions by the ERC amount.
• The IRS will waive penalties.

Companies that participate in this program and amend their federal income tax returns for the applicable year to reinstate the deduction for wages paid by the ERC amount may generate a refund. Conversely, if a company has not yet amended its income tax return to reduce its deduction for wages by the ERC amount, there may be no additional income tax benefit to participating in this program.

Eligibility Requirements

To be eligible for participation in this second VDA program, companies must meet the following criteria:

• The company must not be under criminal investigation or have received notice from the IRS of an impending criminal investigation.
• The IRS must not have received information from a third party alerting it to the company’s noncompliance (potentially from an ERC consulting firm under IRS examination) or from an enforcement action (possibly involving an ERC consulting firm).
• The company must not be under employment tax examination for the first, second, or third quarters of 2021, the period to which the VDA program applies.
• The company must not have received a notice from the IRS indicating it is recapturing (clawing back) the company’s ERC.
• The company must not have received a demand for repayment of all or a portion of the ERC.
• The company must provide information regarding the advisor or return preparer who assisted or advised in claiming the ERC.
• The company must sign a closing agreement to document compliance with the VDA.

How to Enter the VDA Program

To enter the VDA program, the company must submit Form 15434, “Application for Second Employee Retention Credit (ERC) Voluntary Disclosure Program,” by November 22, 2024. The application must be signed under penalty of perjury and include the following:

• The company’s name, taxpayer ID, current address, and daytime phone number. If a representative (attorney, accountant, or other practitioner) will represent the company, a Form 2848, “Power of Attorney and Declaration of Representative,” should be included.
• Identification of the periods during which the company claimed the ERC and the amount claimed (noting that claims related to 2020 quarters are not eligible for this VDA program).
• Agreement to extend the time for the IRS to assess employment tax by signing a Form SS-10.
• If a third-party payer (such as a PEO or payroll company) claimed the ERC on the company’s behalf, the company must include the relevant pages of the Schedule R allocation schedule attached to the Form 941 filed by the third-party payer.
• Identification of the return preparer or tax advisor who assisted in claiming the ERC.
• Electronic payment of the amount due under the VDA program using the Electronic Federal Tax Payment System, with a separate tax payment made for each quarter.
• If the company is unable to pay the full 85% of the ERC required under this program, a completed Form 433-B, “Collection Information Statement for Businesses,” and all supporting documentation must be included. Additionally, all potentially “responsible persons” involved in the company’s payroll tax administration must submit their own Form 2750, “Waiver Extending Statutory Period for Assessment of Trust Fund Recovery Penalty.”

This last requirement for submitting Form 2750 marks the first time the IRS has explicitly suggested that, in the event of a clawback of improper ERC refund claims, responsible persons could be held personally liable if the company is unable to pay the tax. This is noteworthy because the ERC is a credit against the employer’s portion of payroll taxes (Social Security or Medicare taxes, depending on the quarter), while responsible persons are generally liable for trust fund taxes, which comprise the employee’s share of payroll taxes that the employer is required to withhold—individual income tax and the employee’s share of Social Security and Medicare tax. The IRS has not clarified how the ERC credit, which does not apply to trust fund taxes, could result in potential personal liability. Nevertheless, the IRS has introduced the possibility of personal liability, and companies considering this second ERC voluntary disclosure should weigh this risk when deciding whether to participate.

Conclusion

This second VDA program for improper employee retention credits, while less generous than the initial program that ended in March 2024 (which allowed participants to retain 20% of the ERC), reflects the IRS’s intent to resolve as many improper ERC claims as possible before intensifying enforcement efforts to reclaim the refunds and impose penalties and interest. Based on historical IRS enforcement trends, companies that have received improper ERC refunds should not anticipate another opportunity to resolve improper claims on more favorable terms than this VDA program, which concludes on November 22.

Businesses that may have received improperly claimed ERC refunds should consider participating in this VDA program. In some cases, a company might have been eligible to claim the ERC for one quarter but not for others. In such cases, a company could choose to participate in the VDA program only for the quarters for which it was not eligible. For instance, if a company partially suspended business operations due to a COVID-related government order in effect during the first quarter of 2021, but the order expired on March 31, 2021, the company would not be entitled to claim the ERC for wages paid in the second and third quarters of 2021. On these facts, the company might decide to enter the VDA program only for the refunds received for the second and third quarters. However, the company should first consult with a trusted tax attorney to determine if it meets the requirements to qualify for the ERC refund.

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