Burdened by heaps of paperwork and knowing many of the Employee Retention Credit claims they still needed to sort through were sketchy at best and outright fraudulent at worst, the Internal Revenue Service opened up a voluntary disclosure program last year that would allow employers to take back their erroneous ERC claims without eating big penalties. If accepted into the program, an employer would need to repay only 80% of the credit they received.
Why 80%? Because many of the employers caught up in this flood of dubious ERC claims did so at the urging of what the IRS calls “aggressive promoters” — the cottage industry that popped up around the many pandemic-era credits and quickly overtook those people calling you about your car’s extended warranty as the most obnoxious of unsolicited calls. Even we got emails from these people promising huge payoffs if our business applied for ERC credits, credits that these non-CPA hawkers of tax credits swore were basically free money. Paycheck Protection Program (PPP) loans were actually free money, ERC not so much and using the PPP free money glitch disqualified employers from double dipping on ERC. Anyway, employers that fell for these promises would pay a fee to the “aggressive promoter” who urged them to file, a payment due prior to seeing any money from the IRS. Thus the IRS is being unusually kind and not requiring voluntary disclosers to pay back the full amount they received in erroneous ERC. You can bet they’ll be extracting that pound of flesh from whatever “aggressive promoters” they can nail to the wall.
Many employers that filed ERC claims — not only the ones suckered by smooth-talking telemarketers but legitimate, qualified employers — are still waiting on payments.
The voluntary disclosure program was strictly for employers who’d seen payouts as a way for them to pay it back. The voluntary withdrawal program was for those still waiting on ERC claims to be paid out, including employers with checks from the IRS they hadn’t yet cashed, and came with no penalty at all. If a voluntary withdrawal was accepted, the IRS would pretend it never happened (“Claims that are withdrawn will be treated as if they were never filed”) and everyone would go on with their lives.
ERC had very specific requirements, requirements that many filers didn’t actually meet. As its name suggests, Employee Retention Credits were meant to encourage struggling employers to keep people on staff in the early days of lockdowns. In order to qualify an employer had to pay qualified wages to some or all employees after March 12, 2020, and before January 1, 2022.
Generally, businesses and tax-exempt organizations that qualify are those that:
- Were suspended by a government order due to the COVID-19 pandemic during 2020 or the first three calendar quarters of 2021, or
- Experienced the required decline in gross receipts during 2020 or the first three calendar quarters of 2021, or
- Qualified as a recovery startup business for the third or fourth quarters of 2021
By the time the IRS issued a moratorium on processing ERC claims in September 2023, they’d discovered thousands of claims that failed to meet the basic criteria for the ERC program such as A) being a business and B) having employees on the payroll. But that still left plenty of borderline cases that weren’t immediately clear as legit or not. This past June, the agency announced it had digitized and analyzed about one million ERC claims representing more than $86 billion and was making progress on the difficult task of sorting ERC claims into fraud, maybe bullshit, and probably OK categories. They identified some common red flags that were a recurring theme in many ERC claims destined to be rejected or worse:
- Essential businesses during the pandemic that could fully operate and didn’t have a decline in gross receipts – The most basic of requirements to qualify for ERC. Essential businesses didn’t qualify because their operations weren’t suspended or disrupted by government orders. “Modifications that didn’t affect an employer’s ability to operate, like requiring employees to wash hands or wear masks, doesn’t mean the business operations were suspended,” said the IRS.
- Business unable to support how a government order fully or partially suspended business operations – If everyone could stay home and continue working, the IRS doesn’t consider the business disrupted.
- Business reporting family members’ wages as qualified wages. – As it describes. Wages paid to related individuals and members of the same household aren’t qualified wages for the ERC.
And as mentioned above, another flag for a possibly bad ERC claim is businesses using wages already used for PPP loan forgiveness. They can’t claim ERC on wages they reported as payroll costs to get PPP loan forgiveness.
Now imagine used car salesmen trying to explain all these rules to some rube in Nebraska who was just trying to keep his business afloat in 2020.
Leading up to the end of the voluntary disclosure program on March 22, the IRS pushed out many reminders that the window to admit your business took ERC money it wasn’t entitled to was quickly closing. Hurry up and disclose or it’s gonna hurt! This is your last chance or we’re gonna bend you over! Don’t make us do it!
Well, they’ve opened the window again. Announced August 15, Voluntary Disclosure Program v.2 is live and open until November 22. Here’s what they said:
The Employee Retention Credit (ERC) Voluntary Disclosure Program (VDP) will run through November 22 and allow businesses a chance to correct improper payments at a 15% discount and avoid future audits, penalties and interest. During the first disclosure program that ended in March, there were more than 2,600 applications from ERC recipients that disclosed $1.09 billion worth of credits.
To underscore the importance of participating in the Voluntary Disclosure Program, the IRS also announced it plans to mail up to 30,000 new letters to reverse or recapture potentially more than $1 billion in improper ERC claims. Thousands more mailings on additional questionable payments will be made in the fall.
“The limited reopening of the Voluntary Disclosure Program provides an opportunity for those with improper claims to come in ahead of IRS compliance work and get a discount on repayments,” said IRS Commissioner Danny Werfel. “This is especially important given increasing IRS compliance actions involving bad claims, many of them are the result of aggressive marketing tactics to lure unsuspecting businesses into claiming the complex credit. This provides a final window of opportunity for those misled businesses to make adjustments and avoid future compliance action by the IRS.”
2,600 applications is a lot but compare that to the 1.4 million open claims the IRS had in June. After the September moratorium, the IRS was seeing more than 17,000 ERC claims come in every week.
“The push by promoters flooded the IRS with questionable ERC claims, which clogged our systems and slowed work,” said Werfel. “We recognize well-meaning businesses are caught up in this, and we are taking important steps to help them. This includes reopening the Voluntary Disclosure Program as well as getting more payments out to qualifying businesses.”
As of May, IRS Criminal Investigation has initiated 450 criminal cases, with potentially fraudulent ERC claims worth nearly $7 billion. 36 investigations have resulted in federal charges so far, with 16 investigations resulting in convictions and seven sentencings with an average sentence of 25 months.
IRS reopens Voluntary Disclosure Program to help businesses with problematic Employee Retention Credit claims; sending up to 30,000 letters to address more than $1 billion in errant claims [IRS]
