Don't Mess With Taxes

Only 80% of wrongly-claimed Employee Retention Credit amounts must be repaid.

Photo by Anastasiia Chepinska on Unsplash

We're all aware of the continuing medical issues from long COVID. The coronavirus' tax effects appear to be just as persistent.

The Internal Revenue Service is still dealing with law changes enacted to provide pandemic relief. The Employee Retention Credit, or ERC, is one of them.

This refundable business tax credit was designed for companies that continued paying employees during the COVID-19 pandemic despite financial hardship. To qualify, the businesses were either fully or partially suspended due to a government order, or had a decline or significant decline in gross receipts during the eligibility periods.

Earlier this year, aggressive promoters of the ERC convinced many businesses to apply for the tax break. However, the IRS soon discovered that not all the claims were legitimate, and suspended processing of the returns making the claims.

The tax agency also began looking more closely at some of the ERC money it issued.

Now, the IRS is offering firms that erroneously claimed the ERC a chance to pay most — 80 percent — of that tax credit money back via a new voluntary disclosure program. The special disclosure program runs through March 22, 2024.

Disclosure eligibility basics: Any employer who already received the ERC for a tax period, but isn't entitled to it can apply if the following conditions also are true.

• The employer is not under criminal investigation and has not been notified that they are under criminal investigation.
• The employer is not under an IRS employment tax examination for the tax period for which they're applying to the Voluntary Disclosure Program.
• The employer has not received an IRS notice and demand for repayment of part or all of the ERC.
• The IRS has not received information from a third party that the taxpayer is not in compliance or has not acquired information directly related to the noncompliance from an enforcement action.

Once a business determines it is eligible, it must file IRS Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program. The Form 15434 must be submitted using the IRS Document Upload Tool.

If the IRS approves the program application, it will mail the employer a closing agreement. The employer must then repay 80 percent of the ERC they received, either online or by phone, using the Electronic Federal Tax Payment System (EFTPS).

The IRS said it chose EFTPS because it is the Treasury Department system that most businesses (and some individuals, like moi) already use to pay various federal tax obligations.

No interest and penalty charges: Companies that obtained an ERC in error and pay most of it back as part of the voluntary disclosure program get another break from the IRS.

The tax agency says it won't charge disclosure program participants interest or penalties on any credits they repay, as long as they can return 80 percent of errant credit to Uncle Sam.

Further qualifications and program details are in IRS Announcement 2024-3. Additional details also can be found in the disclosure program's frequently asked questions. You also should check out the special IRS.gov ERC eligibility checklist.

Lower payback offsets claim fees: The IRS decision to allow qualifying ERC voluntary disclosure participants to pay back just 80 percent of the credit they received was based on the claims' dubious circumstances.

Many of the ERC promoters charged a percentage fee that they collected at the time of payment or in advance of the payment. That prevented the business owners from receiving the full ERC amount.

"The disclosure program provides a much-needed option for employers who were pulled into these claims and now realize they shouldn't have applied," said IRS Commissioner Danny Werfel.

"From discussions we have had with taxpayers and tax professionals around the country, we understand that there are many employers eager to correct their error, but who remain concerned about their ability to pay back the portion of the credit that has been lost to the promoter that brought them into this mess. This new option, with an opportunity to get right with a lower financial cost, provides the relief these taxpayers requested," added Werfel.

ERC installment payback available, at a cost: If a business owner is not able to pay back 80 percent of the wrongly issued credit, it may be considered for an installment agreement on a case-by-case basis, pending submission and review of Form 433-B, Collection Information Statement for Businesses, (excerpt shown below) and all required supporting documentation.

See more tax forms and more about them at Tax Forms 2023.

However, those who qualify for ERC installment payback will pay more.

Unlike cases where 80 percent immediate ERC repayment means no interest or penalties, those added assessment will be collected in connection with an ERC installment agreement.

Naming names: Werfel also noted that the disclosure program will help IRS efforts to gather information on promoters who created this situation by aggressively pushing people to apply for the credit.

To qualify for the ERC disclosure program, the employer must provide the IRS with the names, addresses, and telephone numbers of any advisors or tax preparers who advised or assisted them with their claim, as well as details about the services provided.

And while the ol' blog isn't naming names, since the intentions of some of these aggressive ERC promoters, especially the operators of ERC claim mills, were not on the up-and-up, with some no doubt crossing the legal line, this latest ERC development is this week's Tax Felon Friday feature. 

More IRS ERC outreach: In addition to the ERC voluntary disclosure program, the IRS also announced that it has started sending up to 20,000 letters to ERC claimants with proposed tax adjustments that will recapture the erroneously claimed credit.

These mailings are in addition to the more than 20,000 credit denial letters announced earlier in December.

The latest ERC letters also are just for tax year 2020. The IRS says it is still working on erroneous 2021 ERC claims, and additional mailings in connection with those filings are planned.

If the IRS identifies an employer that has received excessive or erroneous ERC, the agency will reclaim that ERC through normal tax assessment and collection procedures.

"These letters are another incentive for businesses that believe they received an erroneous Employee Retention Credit payment to come forward and participate in the disclosure program," Werfel said. The 80 percent voluntary repayment option, the commissioner noted, "is much more generous than later IRS action, which includes steeper costs and greater risk. We hope these taxpayers take advantage of this window now."

Taking back pending ERC claims: Finally, the IRS took advantage of the repayment program announcement to remind businesses that they can withdraw a questionable ERC claim that hasn't yet been processed.

This special ERC claim withdrawal process is available for a few more days, until the end of 2023.

By withdrawing an improper claim before any refund is issued, businesses can avoid future repayment, interest, and penalties. They can also withdraw their claim if they've received a check, but have not yet deposited or cashed it.

Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose penalties or interest.

The IRS says it continues to see a large amount of interest in the withdrawals, with more than $100 million from pending applicants withdrawn by early December.

You also might find these items of interest:

• Tips if the IRS audits your business’ ERC claim
• IRS allows businesses to withdraw improper ERC claims
• IRS sends ERC disallowance letters to 20,000+ claimants
• IRS halts ERC claims, warns businesses about scam promoters

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