By Duncan B. Will, CPA/ABV/CFF, CFE and Anthony J. Cooper, J.D., MBT

In late December 2023, the IRS announced a Voluntary Disclosure Program for taxpayers who claimed and received the Employee Retention Credit (“ERC”) but are ineligible. The IRS Voluntary Disclosure Program (“VDP”) follows the IRS announcement in October 2023 that allows certain taxpayers who filed an ERC claim (but have not yet received a refund) to withdraw their submission without penalty. The IRS initiated these two opportunities as part of their ongoing efforts to combat dubious ERC claims, as the IRS is aware ERC scammers have misled well-intentioned taxpayers into believing that they qualify for the ERC.

CPA firms who have clients that may (or should) be questioning whether they were, in fact, eligible for the ERC should advise these clients to consider the IRS withdrawal option or Voluntary Disclosure Program if they meet the eligibility criteria. Although in-depth analyses are beyond the scope of this article, below are highlights for your reference.

ERC Withdrawal Option
To help protect taxpayers from penalties that could be imposed on ineligible claims, the IRS withdrawal option permits taxpayers that filed an ERC claim for which they were ineligible and have not yet received a refund (or who have received an ERC refund check but have not yet cashed or deposited it) withdraw their claims and avoid the imposition of interest and penalties.

Taxpayers opting to withdraw their ERC claim through this method are requesting the IRS to disregard the entire adjusted employment tax return. Claims that are withdrawn will be treated as if they were never filed, and the IRS will not assess penalties or interest. Taxpayers who utilize the withdrawal process will receive a letter from the IRS about whether their request was accepted or rejected. This method does not apply to taxpayers who have made additional adjustments on a claim or only wish to reduce the amount of their claim. Such taxpayers will need to file an adjusted employment tax return on Form 941-X.

Generally, withdrawn claims are treated as if they were never filed. However, taxpayers found to have willfully filed a fraudulent claim, and those who assisted or conspired to do so, remain subject to criminal investigation and prosecution.

ERC Voluntary Disclosure Program
The VDP enables eligible taxpayers to reimburse a substantial portion of ERC funds received under potentially noncompliant claims. Acknowledging that many taxpayers sought ERC claims with the assistance of third-party advisers (many of whom were paid contingent fees), the IRS identified instances where eligibility requirements were misinterpreted.

To participate in the Voluntary Disclosure Program, taxpayers must complete and submit an application on IRS Form 15434 by March 22, 2024.

Under this program:

• Taxpayers are obligated to repay only 80% of the claimed ERC, with the remaining 20% exempt from income taxes.
• No interest or penalties will be imposed on the underpayment of employment taxes resulting from a non-qualifying ERC claim if the 80% repayment is made before executing the closing agreement.
• Taxpayers who participate in the VDP may need to amend prior year income tax returns to obtain the full benefit of the wage expenses.

Eligibility Criteria for the ERC Voluntary Disclosure Program:
The Program is applicable to eligible taxpayers who filed an ERC claim, received a credit or refund, and meet the following conditions:

• Not under criminal investigation or notified by the IRS of intent to commence a criminal investigation.
• Not under an employment tax examination for the relevant period.
• Not previously issued a notice and demand for ERC credit or refund repayment.
• Not previously identified by the IRS, either by a third party or through enforcement actions, as being noncompliant.

Risk Management Guidance

• CAMICO strongly recommends that firms inform and advise clients in writing of the availability of:
  • The option to withdraw their ERC claim submissions, and
  • The Voluntary Disclosure Program, that will sunset on March 22, 2024.

CAMICO has a client notification template for this purpose that is available on the Members-Only Site’s Tax Resource Center.

• Retain a list of all clients to whom you send the notification.
• Determine your firm’s willingness, knowledge, expertise, and risk tolerance to take on assisting eligible clients with either or both programs, and if you decide to do so, assess what services you are willing to offer and how best to deliver those services. If you determine that your firm will not render such services, make it clear in your client notification that you are advising firms to consult with a qualified professional.
• If requested to assist a client with either or both programs:
  • Assess whether the specific client needs may require a level of knowledge and expertise that would be better suited for another qualified professional. For example, consider whether the client would benefit from having these services receive attorney-client privilege by working directly with or having these services under the umbrella of a qualified tax attorney. Also, the client may be better served by having the original preparer/processor assist with the withdrawal process or application for the VDP.
• If agreeing to assist a client with a withdrawal request or application to the ERC Voluntary Disclosure Program:
  • Obtain a signed standalone engagement letter that clarifies the limited services the firm is rendering and contains appropriate disclaimer language.
  • In addition, obtain written client representations acknowledging that management is responsible for the accuracy and completeness of the information they provide to the firm for purposes of assisting with the withdrawal request or assisting with completing the application for the VDP, and acknowledging their understanding that the firm is not providing any services to assist with determining eligibility for the ERC as part of this limited service.
  • CAMICO templates for both the engagement letter and management representation letter are available on the Members-Only Site’s Tax Resource Center.

Additional Information

IRS Resources
IR-2023-193 Withdrawal process for ERC claims (October 2023)
IR-2023-247 Voluntary Disclosure Program (December 2023)

AICPA Resources
AICPA Employee Retention Credit Resource Center

Employee Retention Credit Client Documentation Memo Template [available to AICPA Tax Section members] is a customizable MS Word template designed to document discussions with clients regarding their eligibility for the credit, the conclusion as to their eligibility, and the basis for those conclusions; as well as a checklist of cautionary communications describing potential consequences including the option to file Form 14242, Report Suspected Abusive Tax Promotions or Preparers.

CAMICO Resources
CAMICO has developed risk management resources on this topic, and you can access them by logging on to CAMICO’s Members-Only Site under the Tax Resource Center.

CAMICO policyholders with questions regarding this communication or other risk management questions should contact the Loss Prevention department at lp@camico.com or call our advice hotline at 800.652.1772 and ask to speak with a Loss Prevention Specialist.