IRS Reopens Voluntary Disclosure Program: What Businesses Need to Know

IRS Reopens Voluntary Disclosure Program: What Businesses Need to Know

August 23, 2024

The IRS announced on August 15, 2024 that the Voluntary Disclosure Program (VDP) has reopened and will be available until November 22, 2024, providing businesses with a crucial opportunity to correct improper Employee Retention Credit (ERC) claims. This move is part of a broader effort by the IRS to address the widespread issues that have emerged around the ERC, many of which stem from aggressive marketing tactics that misled businesses into filing erroneous claims. If your business claimed the ERC for any quarter in 2021 and you now believe you were ineligible, this program could be your best chance to resolve the issue and avoid future penalties.

Understanding the Employee Retention Credit and Its Challenges

The ERC was originally designed as a financial relief measure during the COVID-19 pandemic, helping businesses retain employees during challenging times. However, as the program progressed, it became the target of aggressive and often misleading marketing efforts. These tactics led many well-meaning businesses to file for the credit without fully understanding the eligibility requirements, resulting in numerous improper claims.

In response to this, the IRS has intensified its compliance efforts, resulting in numerous audits and criminal investigations to address the influx of erroneous claims. Concurrently with this reopened VDP, the IRS is sending up to 30,000 Reversal Notices attempting to recover over $1 billion in erroneous ERC payments. If a business receives a Reversal Notice, they will not be eligible to participate in the VDP. The IRS is offering all other businesses caught in this situation a final opportunity to self-correct through the reopened VDP.

Key Benefits of the Reopened VDP

Participating in the second ERC Voluntary Disclosure Program offers several significant benefits:

• Discount on Repayment: Businesses only need to repay 85% of the ERC received, benefiting from a 15% reduction.
• No Interest on Refunds: If the ERC was received as a refund, businesses do not need to repay any interest.
• No Amendments Required: Participants do not need to amend their income tax returns to reduce wage expenses.
• Non-Taxable Reduction: The 15% reduction is not considered taxable income.
• Avoid Audits: The IRS will not audit the ERC for tax periods resolved under the VDP, providing peace of mind for businesses.

These benefits make the VDP an attractive option for businesses that have realized they were not entitled to the ERC they claimed.

Who Is Eligible to Apply?

The reopened VDP is available to businesses, tax-exempt organizations, and government entities that improperly claimed ERC for 2021. To qualify, your business must meet the following criteria:

• ERC Processed and Paid: Your ERC was processed and paid as a refund or credit, and you now believe you were not eligible for ERC.
• No Current IRS Audit: You are not currently under employment tax examination or criminal investigation by the IRS.
• No Reversal Notice: The IRS has not notified you of an intent to reverse your ERC claim.

If you meet these requirements, you can apply for the VDP and correct your ERC claim before facing potential audits or penalties.

How to Apply for the VDP

To participate in the VDP, you need to complete and submit an application package by November 22, 2024. The application process involves the following steps:

1. Prepare Form 15434 - Application for Employee Retention Credit Voluntary Disclosure Program.
2. Complete ERC-VDP Form SS-10 - Included within Form 15434.
3. Sign and Submit Form 2750 - Waiver Extending Statutory Period for Assessment of Trust Fund Recovery Penalty.
4. Submit the Package - Use the IRS Document Upload Tool to submit your application by 11:59 p.m. local time on November 22, 2024.

If you are unable to pay the full amount owed under the VDP, you may request an installment agreement by including Form 433-B, Collection Information Statement for Businesses, in your application package. This request will be considered on a case-by-case basis by the IRS.

What to Expect After Submission

Once your application is submitted, the IRS will review it and determine your eligibility for the VDP. If your application is accepted, the IRS will send you a closing agreement, which must be signed and returned along with the repayment amount (minus the 15% discount). It’s important to pay the balance due by the time you return the signed agreement to avoid penalties and interest.

If your application is rejected, the IRS will explain the reason for rejection and may offer alternative solutions, such as correcting the error and resubmitting your application or filing an amended employment tax return.

Don’t Miss This Final Opportunity

The reopened Voluntary Disclosure Program represents a final, critical opportunity for businesses to correct erroneous ERC claims and avoid severe consequences. With the IRS ramping up compliance actions, including audits and criminal investigations, it’s essential for businesses to act now.

If your business claimed the ERC and now suspects it was ineligible, participating in the VDP or considering the ERC Claim Withdrawal Program for pending claims could save you from costly penalties, interest, and audits down the line.

Don’t let this opportunity pass—protect your business by contacting us today for assistance to resolve any ERC-related issues before the November 22, 2024, deadline.  Larson and Company has developed a suite of services specifically to serve the needs of companies of all sizes in a wide range of industries and is happy to assist you.  

Resources:

1. December 6, 2023 – IRS announces 20,000 ERC disallowance letters being mailed
   1. https://www.irs.gov/newsroom/irs-expands-work-on-aggressive-employee-retention-credit-claims-20000-disallowance-letters-being-mailed-more-action-and-voluntary-disclosure-program-coming
2. December 21, 2023 – IRS launches 1^st ERC VDP
   1. https://www.irs.gov/newsroom/irs-new-voluntary-disclosure-program-lets-employers-who-received-questionable-employee-retention-credits-pay-them-back-at-discounted-rate-interested-taxpayers-must-apply-by-march-22
3. August 8, 2024 – IRS update on ERC processing and compliance enforcement
   1. https://www.irs.gov/newsroom/irs-moves-forward-with-employee-retention-credit-claims-agency-accelerates-work-on-complex-credit-as-more-payments-move-into-processing-vigilance-monitoring-continues-on-potentially-improper-claims
      1. Additional payments for 50,000 valid claims moving into processing, more in the fall
      2. ERC claim withdrawal process – more than 7,300 entities withdraw $677 million in claims
      3. 1^st VDP received more than 2,600 applications worth $1.09 billion in ERC
      4. As of July 1, 2024, more than 460 criminal cases initiated – potentially fraudulent claims worth nearly $7 billion
      5. Promoters beware – The IRS’s Office of Promoter Investigations has received hundreds of referrals – Civil and criminal enforcement to follow
      6. IRS has thousands of ERC claims currently under audit
   2. August 15, 2024 – IRS announces reopened ERC VDP
      1. https://www.irs.gov/coronavirus/employee-retention-credit-voluntary-disclosure-program
      2. https://www.irs.gov/newsroom/irs-reopens-voluntary-disclosure-program-to-help-businesses-with-problematic-employee-retention-credit-claims-sending-up-to-30000-letters-to-address-more-than-1-billion-in-errant-claims
      3. https://www.irs.gov/newsroom/irs-provides-details-of-second-employee-retention-credit-voluntary-disclosure-program-program-for-improper-claims-open-through-nov-22
         
         

Larson and Company has developed a suite of services specifically to serve the needs of companies of all sizes in a wide range of industries.  For additional questions on guidance on this topic, please contact Tax Parter Rick Van Valkenburgh today.