08/19/2024 | News release | Distributed by Public on 08/19/2024 14:10
On Aug. 15, 2024, the IRS announced a second voluntary disclosure agreement (VDA) program for companies that claimed the employee retention credit (ERC) enacted under the CARES Act. Companies that may have already received ERC refunds from improper claims should consider taking advantage of this VDA program before the IRS identifies the erroneous refund.
This pandemic-era program provided a tax credit for wages paid between March 13, 2020, and Sept. 30, 2021, if (among other requirements) a company fully or partially suspended business operations due to a COVID-related government order or experienced a significant decline in gross receipts. The maximum credit allowed-assuming the company met numerous requirements -was $26,0000 per employee. However, many companies filed for the ERC even though they might not have been eligible for some or all of the credit. The IRS announced that the vast majority of pending ERC claims were improper and indicated it is likely many companies that have already received ERC refunds may have filed improper claims.
This resulted in the Aug. 15 announcement of a second VDA program, following an earlier program, which ended March 22, 2024. The IRS limited this VDA program to ERC claims for wages paid in 2021 (not for ERC refunds related to wages paid in 2020). Furthermore, it would not apply to any claim potentially considered criminal. In the case of fraudulent ERC claims, the company would need to utilize the IRS Criminal Investigation Voluntary Disclosure Practice.
The new VDA program provides the following benefits:
Companies that participate in this program and amend their federal income tax returns for the year the ERC applied to reinstate the deduction for wages paid by the ERC amount may generate a refund. On the other hand, if a company has not yet amended its income tax return to reduce its deduction for wages by the ERC amount, there may be no additional income tax benefit to participating in this program.
Companies must satisfy the following requirements to be eligible to participate in this second VDA program:
To enter this VDA program, the company must file Form 15434, "Application for Second Employee Retention Credit (ERC) Voluntary Disclosure Program," by Nov. 22, 2024, signed under penalty of perjury, and:
This last requirement to submit a Form 2750 marks the first time the IRS has expressly raised the implication that if there is a clawback of improper ERC refund claims, and the company is unable to pay the tax, the responsible persons would be held personally liable. This is surprising because the ERC is a credit against the employer's portion of payroll taxes (Social Security or Medicare taxes, depending on the quarter), but responsible persons are potentially liable for trust fund taxes, which are the employee's share of payroll taxes to be withheld by the employer-individual income tax and the employee's share of Social Security and Medicare tax. The IRS does not address how the ERC credit, which is not a credit against trust fund taxes, can result in potential personal liability. Nonetheless, the IRS has put the specter of personal liability on the table. We will need to wait for further explanation from the IRS on this but companies considering this second ERC voluntary disclosure should consider the potential risk of personal liability when deciding whether to participate.
This is the second VDA program for erroneous employee retention credits. Although not quite as generous as the initial VDA program that expired in March 2024 (which allowed a participant to retain 20% of the ERC), it demonstrates the IRS's desire to resolve as many improper ERC claims as quickly as possible before aggressively enforcing erroneous ERC claims to claw back the refunds and seek penalties and interest. If past IRS enforcement initiatives provide any hint to future IRS enforcement, companies who have received improper ERC refunds should not expect another opportunity to resolve improper ERC claims on terms better than this VDA program, which ends Nov. 22.
Companies that may have received improperly claimed ERC refunds should consider participating in this VDA program. In some situations, a company may have been entitled to claim the ERC for a particular quarter, but not for additional quarters. In such a situation, a company could limit its participation in the VDA program for the quarters for which it was not entitled. For example, assume a company partially suspended business operations due to a COVID-related governmental order in effect for the first quarter of 2021, but which expired March 31, 2021. If the company claimed the ERC for wages paid for the second and third quarters of 2021, it was not entitled to do so. On these facts, the company may choose to enter the VDA program only for the second and third quarter refunds. However, the company should first consult with a trusted tax advisor to determine if it meets the requirements to qualify for the ERC refund.