Aggressive promotion, scams, and ERC mills—that’s the drama surrounding the employee retention credit (ERC). The ERC was a lifeline for small businesses struggling to stay open during the pandemic. But bad actors quickly pounced on the opportunity. “ERC mills” began aggressive marketing campaigns advising employers to apply (even if they didn’t qualify) and collecting hefty upfront fees.
As a result, a slew of unqualified applications flooded the IRS. In response, the IRS temporarily stopped new ERC processing and sent 20,000 disallowance letters to employers who incorrectly claimed the ERC.
The IRS’s work of combatting false claims doesn’t end there. On December 21, 2023, the IRS unveiled a new program known as the ERC Voluntary Disclosure Program (ERC-VDP). Through the ERC-VDP, employers who claimed and received the credit in error can pay it back at a discounted rate. But the program only runs through March 22, 2024.
Employee retention credit terms [cheatsheet]
Here’s a quick-reference guide to the employee retention credit, disallowance letters, the ERC-VDP, and ERC claim withdrawals:
|Employee Retention Credit
|Fully refundable tax credit eligible employers who kept employees on payroll during the COVID-19 pandemic could claim.
Credit is available on qualifying employee wages paid between March 13, 2020 and December 31, 2021.
|ERC Disallowance Letters
|Letter 105C, Claim Disallowed, from the IRS notifies employers that they do not qualify for the employee retention credit and must return the money they claimed and received.
|ERC Voluntary Disclosure Program
|IRS program that lets employers who received the ERC in error repay 80% of the claim received.
The program runs through March 22, 2024.
|Withdraw an ERC Claim
|Employers who filed a claim but haven’t yet received the refund for the ERC can withdraw their claim.
Employee retention credit overview
The employee retention credit is a fully refundable coronavirus payroll tax credit for employers who kept employees on payroll during the pandemic. The ERC was first established under the CARES Act and later expanded under the Consolidated Appropriations Act and the American Rescue Plan Act.
Under the CARES Act, employers could claim 50% of qualified wages (up to $10,000 per employee, per quarter) paid to employees between March 13, 2020 and December 31, 2020. For 2020, employers could receive up to $5,000 per employee annually. The business had to have 100 or fewer employees to qualify for the ERC in 2020. And, the business had to be fully or partially shut down by a governmental order or have a decline of 50% or more in gross receipts during a quarter (compared to the same quarter in 2019).
Under the Consolidated Appropriations Act and American Rescue Plan Act, employers could claim 70% of qualified wages (up to $10,000 per employee, per quarter) paid in 2021. For 2021, employers could receive up to $7,000 per quarter (up to $28,000 per year) per employee. The business had to have 500 or fewer employees to qualify for the ERC in 2021. And, the business had to be fully or partially shut down by a governmental order or have a decline of 20% or more in gross receipts during a quarter (compared to the same quarter in 2019 or the immediately preceding quarter in 2020 or 2021).
In short, small employers had to meet rigorous requirements to qualify for the employee retention credit. Employers could then apply for the credit on federal employment tax returns (e.g., Form 941). Employers may have until 2024 and 2025 to claim the employee retention credit retroactively.
For small business owners, the ERC provided a way to keep their companies operating and employees paid during a difficult time. Unfortunately, the IRS noticed an uptick in aggressive marketing surrounding the ERC.
ERC mills and aggressive promotion
The IRS is working on hundreds of criminal cases and referring thousands of ERC claims for audit. The ERC mills’ aggressive marketing targeted many unqualified businesses.
According to the IRS, warning signs of aggressive ERC marketing include:
- Unsolicited calls or ads that say it’s an “easy application process”
- Statements that the ERC promoter can determine eligibility in minutes
- Large upfront fees or fees based on a percentage of the refund amount
- The preparer’s refusal to provide their identifying information or sign the ERC return
- Overpromising that the business qualifies for the credit before discussing the company’s tax situation
Sound familiar? If your business trusted an ERC promoter, the IRS offers a chance to come clean through the Voluntary Disclosure Program. And because many ERC promoters charged a percentage fee, the IRS is reducing the payback amount to 80% of the credit.
A word of advice: Work with a trusted tax professional for help claiming credits. A tax professional can work with you to understand your company’s situation and determine eligibility.
What is the ERC Voluntary Disclosure Program?
Businesses that erroneously receive the ERC must pay it back, possibly with significant penalties and interest. However, the ERC-VDP allows businesses to pay it back at a discounted rate of 80%—with no penalties and interest—through March 22, 2024. This means that you only pay back 80% of the credit you received if accepted into the program. And, the IRS will not charge civil penalties for underpaying employment tax attributable to the ERC.
IRS Commissioner Danny Werfel urges employers with questionable ERC claims to take advantage of the ERC-VDP, saying:
…Our compliance activities involving these payments continue to accelerate, and the disclosure program’s 80% repayment figure 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.”
The IRS will reclaim the full amount through regular tax assessment and collection processes if you don’t apply for the program and the IRS flags you for receiving an excessive or erroneous credit.
To participate in the ERC-VDP, you must provide the IRS with the names, addresses, and phone numbers of any advisors or tax preparers who advised or assisted you with your claim, along with details about their services.
Additionally, you must do all three of the following:
- Pay back 80% of the ERC you received
- Cooperate with IRS requests for more information
- Sign a closing agreement
Who can apply to the ERC-VDP?
You may qualify for the ERC-VDP for each tax period that you claimed the ERC on an employment tax return and now believe you were entitled to a $0 credit. To qualify, the IRS must have processed the claim and paid out the credit as a refund or applied it to the tax period or another tax period.
However, not all businesses are eligible for the IRS Voluntary Disclosure Program. You are ineligible if you are under an IRS audit or criminal investigation. You are also ineligible if the IRS reversed or notified you that your claim is invalid (e.g., if you received a disallowance letter).
Businesses that used a third-party payer to file employment tax returns or claim the ERC must contact the third party to apply for the ERC-VDP.
How to apply
To apply to the Employee Retention Credit Voluntary Disclosure Program, you must:
- Fill out Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program
- Other forms you may need to include in your packet include:
- Have an authorized person sign your form(s)
- Follow the IRS instructions to submit your application online using the IRS Document Upload Tool by 11:59 p.m. (local time) on March 22, 2024
What to do if you can’t pay back 80% of the credit right away
Can’t pay the full 80% of the credit you received right away? You can ask the IRS to set up an installment agreement. Keep in mind that installment agreements are subject to penalties and interest.
To request an installment agreement, submit Form 433-B, Collection Information Statement for Businesses, along with required supporting documentation. Form 433-B asks for information about your company’s financials, such as assets and liabilities.
The IRS will consider installment agreement requests on a case-by-case basis.
Withdrawing an ERC claim
Do you have a pending ERC claim that hasn’t been paid yet? Or, did you receive a check but haven’t cashed or deposited it yet?
You can voluntarily withdraw your employee retention credit claim, and the IRS will not impose penalties or interest. The IRS has already received over $100 million in withdrawals. If you withdraw your claim, the IRS will not process your adjusted employment tax return (e.g., Form 941-X).
You can withdraw your claim if you:
- Made the claim on an adjusted employment tax return,
- Filed the return only to claim the ERC,
- Want to withdraw the full amount of your claim, AND
- Haven’t received payment or cashed your check
How you withdraw your ERC claim depends on whether your claim is under audit and whether you received a refund check. The IRS provides full instructions for each type of situation here.
If you use a professional payroll company to handle your payroll and tax reporting responsibilities, consult with them if you want to withdraw your filed claim.
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This article has been updated from its original publication date of December 29, 2023.This is not intended as legal advice; for more information, please click here.