Impacts of IRS Developments on the Employee Retention Tax Credit (ERTC)

As part of ongoing efforts to protect taxpayers from aggressive promoters for the ERTC, the IRS announced a new voluntary disclosure program (VDP) for taxpayers who claimed the ERTC and received their refund but now believe they weren’t eligible.

Proposed Early Termination of ERTC

A draft summary of The Tax Relief for American Families and Workers Act of 2024 was released on January 16, 2024, that includes a proposal for an early termination of the ERTC program. In addition to the early termination for filing ERTC claims, the provision would extend the assessment period of these claims to six years from the claim date.

The proposed bill was passed by the House of Representatives on January 31, 2024, but the Senate has yet to bring the bill to the floor for a vote as of February 5, 2024. It’s unclear if the proposed bill will ultimately pass both chambers of Congress in its present form or if it will be passed at all.

ERTC Voluntary Disclosure Program

The IRS released Announcement 2024-3 and IR-2023-247 on December 21, 2023, providing the VDP for taxpayers who believe they may have mistakenly claimed the ERTC.

As the VDP only applies to taxpayers who deposited money related to their ERTC claim, the protocol for returning any owed funds is different than the ERTC’s withdrawal process.

The IRS has published detailed frequently asked questions (FAQ) on the new program, with some key examples below.

Who’s Eligible for the VDP?

Taxpayers who already received ERTC payment for a tax period but determined they weren’t eligible can participate in the VDP if they:

  • Aren’t under criminal investigation and haven’t been notified of being under criminal investigation.
  • Aren’t under an IRS employment tax examination for the tax period for which they’re applying to the VDP.
  • Haven’t received an IRS notice and demand for repayment of part or all of the ERTC.
  • IRS hasn’t received third-part information that the taxpayers aren’t in compliance or haven’t acquired information directly related to the noncompliance from an enforcement action.

What Relief Is Associated with the VDP?

Eligible taxpayers have until March 22, 2024, to submit their VDP application. If the VDP application is approved and executed by both parties, the relief provides that:

  • Taxpayers only need to repay 80% of the ERTC received and the remaining 20% won’t be taxed as income.
  • If the IRS paid interest on the ERTC claim, the interest doesn’t need to be repaid.
  • Taxpayers don’t need to amend their income tax returns to reduce wage expense for the wages associated with the original ERTC claim.
  • The IRS won’t examine the ERTC claims on the employment tax returns for the tax periods included in the VDP.

Taxpayers won’t be charged penalties or interest on the claimed ERTC amount if the 80% is paid in full no later than when the VDP closing agreement is signed. If taxpayers are unable to pay the required 80% in full, they may be considered for an installment agreement and associated interest and penalties will apply.

How Do Taxpayers Participate in the VDP?

Taxpayers choosing to participate in the VDP will be required to complete a Form 15434 electronically via the IRS document upload tool. For taxpayers that would like to use the VDP for 2020 claims, a separate ERTC VDP Form SS-10 will also need to be completed.

The taxpayer also must provide the IRS with the names, addresses, and telephone numbers of any advisors or tax preparers who advised or assisted them with their claim and details about the services provided.

If the taxpayer used a third-party payer and the payer’s federal employer identification number, such as an agent under Internal Revenue Code (IRC) Section 3504 or a professional employer organization (PEO), to file their ERTC refund claims, the third-party payer must engage in the VDP process on behalf of the taxpayer.

The IRS will prepare a closing agreement with the terms of any VDP settlement. The taxpayer must sign and return the closing agreement to the IRS within 10 days of the date of mailing by the IRS. Full payment of the liabilities under the VDP should be made by the date when the closing agreement is executed unless the taxpayer is approved for an installment agreement.

We’re Here to Help

To learn more about the VDP and how it could impact your business or the Congress proposal to prevent any further ERTC claims from being filed, contact your Moss Adams professional.

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