On August 15, 2024, the IRS announced a second Employee Retention Credit Voluntary Disclosure Program (“ERC-VDP”) for the benefit of businesses and tax-exempt organizations that erroneously claimed the Employee Retention Credit (“ERC”) for 2021 and have received a credit or refund prior to August 15, 2024. The initial Voluntary Disclosure Program (“VDP”) for the 2020 and 2021 years sunset on March 22, 2024. The second ERC-VDP is open until November 22, 2024, and is only available for ERC claims filed for tax periods in 2021 and for which the taxpayer received an ERC refund prior to August 15, 2024.

A notable difference in terms between the two programs is that the first ERC-VDP allowed taxpayers to repay only 80% of their erroneously received ERC refunds, whereas this second ERC-VDP requires taxpayers to repay 85% of their erroneously received ERC refunds.

It is important to note that in addition to the second ERC-VDP, the ERC Withdrawal option that the IRS rolled out in October 2023 is still available and allows certain taxpayers that filed an ERC claim to withdraw their claims without penalty. CPA firms who have clients that may (or should) be questioning whether they were, in fact, eligible for the ERC should advise these taxpayers to consider the IRS ERC-VDP or the withdrawal option if they meet the respective program eligibility criteria. Although in-depth analyses are beyond the scope of this article, below are highlights for your reference.

Second ERC Voluntary Disclosure Program

The IRS introduced the second ERC-VDP to assist taxpayers who have erroneously claimed the ERC for 2021 tax periods. This program provides an opportunity for businesses and tax-exempt organizations to rectify their errors and avoid severe consequences. The program is specifically for those who have already received the ERC and wish to avoid penalties by voluntarily repaying a portion of it. The program, which remains available until November 22, 2024, offers not only a pathway to compliance but also substantial financial relief.

One of the most attractive features of the ERC-VDP is the reduced repayment obligation. Participants are required to repay only 85% of the ERC they received, effectively granting them a 15% reduction. This can significantly alleviate financial burdens, particularly businesses and tax-exempt organizations facing economic difficulties. Additionally, the program eliminates the need to amend income tax returns to reduce wage expense by any of the claimed ERC. Furthermore, the waiver of any interest accrued on ERC refunds provides additional financial relief.

However, it’s crucial to remember that the ERC-VDP is not a universal amnesty program. Eligibility hinges on specific conditions. Taxpayers must have claimed and received the ERC for 2021, currently believe they were not entitled to it, and not be under any IRS examination or criminal investigation. Additionally, the IRS must not have taken any steps to reverse the taxpayer’s ERC. It’s also important to note that those who used third-party payers (employers that claimed the ERC on an employment tax return filed under the third-party payer’s Employer Identification Number) to file their returns or claim the ERC cannot apply directly to the program and must work through the third-party payer.

The application process involves submitting a complete application package by following the instructions on Form 15434 (Application for ERC Voluntary Disclosure Program). The application along with supporting materials must be submitted through the IRS Document Upload Tool by the November 22, 2024 deadline. The IRS will then thoroughly review the application and inform the taxpayer of its decision. If accepted, a closing agreement will be issued, and the taxpayer must fulfill their repayment obligation to avoid penalties and interest.

The ERC-VDP provides a valuable opportunity for eligible taxpayers to correct their mistakes, but it’s important to understand its limitations. It does not protect those who willfully or fraudulently claimed the ERC. Such cases remain subject to potential criminal investigation and prosecution. For taxpayers who genuinely made errors, the program offers a fair and reasonable path to compliance. Taxpayers with criminal concerns should be strongly encouraged to seek assistance from qualified legal counsel. For more details regarding the program and application process, including specific eligibility requirements, refer to the frequently asked questions available on the IRS website: Frequently asked questions about the second Employee Retention Credit Voluntary Disclosure Program | Internal Revenue Service (irs.gov).

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. This option is for those who have not yet received a refund and wish to avoid potential penalties associated with an ineligible claim.

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.

Risk Management Guidance

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

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 ERC-VDP.
• If agreeing to assist a client with a withdrawal request or application to the ERC-VDP:
  • • Obtain a signed stand-alone 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-2024-212 IRS Reopens Voluntary Disclosure Program (August 2024)

IR-2024-213 IRS provides details of second Employee Retention Credit Voluntary Disclosure Program; program for improper claims open through Nov. 22 | Internal Revenue Service (August 2024)

IR-2023-193 Withdrawal process for ERC claims (October 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 in 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.