Written by Christi Frassrand
For the third time in as many months, the IRS recently gave another update on the processing of Employee Retention Credit (ERC) claims and announced that they will reopen the Voluntary Disclosure Program (VDP) to help businesses fix incorrect ERC claims. This comes on the heels of the announcement in June that claims received before September 14, 2023, were being classified according to risk levels assigned by the IRS.
In July, the IRS shared some of the warning signs of incorrect ERC claims and then announced on August 8 that it would begin processing claims filed between September 14, 2023 and January 31, 2024. Most recently, on August 15, the IRS announced the reopening of the VDP Program that will run through November 22, 2024, and will allow businesses a chance to correct improper payments at a 15% discount and avoid future audits, penalties and interest. The IRS is urging businesses yet again to recheck their eligibility requirements for their ERC claims. If a business believes its claim may be questionable, it can self-correct and repay the credits it has already received through this VDP.
Applicants for the VDP that are accepted into the program will need to repay only 85% of the credits they received. This second round of the program is open for tax periods in 2021. Employers can’t use the second VDP to disclose and repay ERC money from tax periods in 2020. In addition, if the IRS paid interest on an employer’s refund claim, the employer does not need to repay that interest. In order to qualify for this program, employers must provide the IRS with the names, addresses, telephone numbers and details about the services provided by any advisors or tax preparers who advised or assisted them with their claims. Please click on the link for FAQs about the VDP.
The IRS has stated that many of these questionable claims filed by employers were driven by aggressive marketing from unscrupulous promoters. To help businesses caught in this situation, the IRS urged them to review five important warning signs and eligibility requirements that were identified in the July news release. They include the following:
- Essential businesses during the pandemic that could fully operate and didn’t have a decline in gross receipts,
- Businesses unable to support how a government order fully or partially suspended business operations,
- Businesses reporting family members’ wages as qualified wages,
- Businesses using wages already used for Paycheck Protection Program (PPP) loan forgiveness, and
- Large employers claiming wages for employees who provided services.
They also reminded businesses about some previously shared signs of incorrect ERC claims:
- Too many quarters being claimed,
- Government orders that don’t qualify,
- Too many employees and incorrect calculations,
- Businesses citing supply chain issues,
- Businesses claiming ERC for too much of a tax period,
- Businesses that didn’t pay wages or didn’t exist during the eligibility period, and
- Promoters saying there’s nothing to lose.
While the IRS is beginning to process additional lower-risk claims, the agency reminds businesses that they may receive payments for some valid tax periods while the IRS reviews other periods of eligibility. The IRS said that the ERC compliance efforts with erroneous claims have now topped more than $2 billion since last fall as the agency continues intensifying activity in this area. The IRS is planning to mail up to 30,000 new letters to reverse or recapture potentially more than $1 billion in improper ERC claims. This will allow businesses to get ahead of IRS compliance work and get a discount on repayments and is going to be especially important given the increasing IRS compliance actions involving what the IRS believes are bad claims. Of course, there are still valid claims outstanding and businesses should hopefully see those being processed in the coming months. But clearly, the focus of the IRS, with the warnings, reminders and the VDP, is on questionable claims.
If a business applies for the VDP, it is not required to pay back any interest income paid to the business by the IRS when its claim was paid. In addition, no amended income tax returns will be required to reduce any wage expenses of the business.
This is the latest push in the continuing efforts by the IRS to ensure that all ERC refunds are valid claims. The IRS also encourages businesses to talk to a trusted tax professional if they have questions about their claims.
Please reach out to a BMSS professional by calling (833) CPA-BMSS or visit our website if you’d like more information.