Don't Mess With Taxes

Did you discover you got an improper Employee Retention Credit (ERC) payment? You still have time to get out of the tax jam by applying for the ERC voluntary disclosure program. (Photo by Unsplash+ in collaboration with Getty Images)

ERC voluntary disclosure deadline is March 22

Last December, the Internal Revenue Service announced that businesses that received improper Employee Retention Credit (ERC) amounts could let the agency know about the error.

In these cases, many of which were created when companies got bad tax advice from aggressive ERC promoters, the companies would have to repay only 80 percent of the erroneously received credit amount.

More importantly, they would avoid subsequent IRS investigation and protentional wrongdoing charges.

The deadline to come clean about a bad ERC is next week. Specifically, you must let the IRS know of the improper claim via its Employee Retention Credit Voluntary Disclosure Program (ERC-VDP) by Friday, March 22.

COVID-19 tax break gone bad: The ERC-VDP is just one way the IRS is dealing with the problems created by this refundable tax credit.

As originally designed, the ERC was to help qualifying businesses who kept paying staff during the economic turmoil of extended COVID-19 pandemic company closures.

The ERC was available during 2020 and 2021, but earlier this year, promoters of the tax break convinced many businesses to apply for it. In some cases, the ERC push was made even if the companies didn't meet all the tax break's eligibility requirements.

And yes, some of them were flat-out tax scams.

When the IRS discovered that many of these recent ERC weren't legitimate, the agency suspended processing of returns that included the tax credit claim.

It also recommended that companies that had filed questionable claims, but not yet received any IRS money related to the ERC, withdraw the claim.

As for those who did get ERC money, but now have doubts about its legitimacy, the IRS established the ERC-VDP. This allows business owners who discovered they got improperly claimed ERC money to alert the IRS, and pay back most of the credit.

Determining disclosure eligibility: If you received the ERC, but discover that you weren't entitled to it, you can apply for the ERC-VDP if the following four conditions also are true.

1. The employer is not under criminal investigation and has not been notified that they are under criminal investigation.
2. The employer is not under an IRS employment tax examination for the tax period for which they're applying to the Voluntary Disclosure Program.
3. The employer has not received an IRS notice and demand for repayment of part or all of the ERC.
4. 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.

Then 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 already use to pay various federal tax obligations.

Financial break for improper ERC admission: In addition to the peace of mind for getting your business' taxes right with the IRS, those who voluntarily disclose their improper ERC also get a financial benefit.

As noted in the application section above, you'll only have to repay 80 percent of errant credit to Uncle Sam. You also will be relieved of any interest and penalty charges that would have been assessed if the IRS found the ERC mistake before you alerted it.

The IRS says it chose the 80 percent repayment level because many of the businesses who used the so-called services of ERC advocates didn't get the full credit amount. They paid the promoters a fee that generally was calculated as a percentage of the dubious credit they claimed.

If you can't pay the 80 percent amount at once, the IRS' collection department will work with you to explore payment options.

You can review the ERC rules to determine whether you need to apply for the voluntary disclosure program.

IRS.gov also has other online ERC resources, including a free video of the IRS' ERC-VDP webinar and highlights of the video if you want a preview; ERC frequently asked questions; and the ERC eligibility checklist, as either an interactive tool or as a printable guide.

You also might find these blog ERC posts of interest:

• IRS welcomes voluntary disclosure of dubious ERC claims
• IRS sends ERC disallowance letters to 20,000+ claimants
• Signs you should consider withdrawing your employee retention tax credit claim

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