IRS Helps Employers Repay Improper ERC Funds at a Discount

Employers in receipt of improperly claimed ERC funds have an avenue for repayment

The IRS issued multiple warnings, a generic legal advice memorandum, and the “dirty dozen” article warning taxpayers against aggressive schemes for claiming COVID-related relief with the employee retention credit (ERC) program.

September 14, 2023 — The IRS announced a moratorium on processing new refund claims through the end of the year to get a better handle on fraudulent claims and to slow the process to identify claims that may be less than reputable.

October 19, 2023 — The IRS issued instructions on how to withdraw improper ERC claims. To date, the IRS has already received over $100 million of withdrawn ERC claims. In addition, the IRS has issued 20,000 denial letters for 2020 ERC credits and has plans to address fraudulent 2021 claims.

November 6, 2023 — The IRS issued a second general legal advice memorandum (AM-2023-007) that discusses in-depth why OSHA guidelines alone are not sufficient to support an ERC claim. While the memorandum does not officially bind the IRS, taxpayers, or the judiciary, it provides a clear perspective on how the IRS agents will treat claims based on OSHA directives.

December 21, 2023 — The IRS issued Announcement 2024-3, a voluntary disclosure program for employers who have received their funds and wish to return them.

The voluntary disclosure program helps employers who paid exorbitant fees to providers

The IRS is sympathetic to the fact that many employers are unable to repay the credit because of their agreement with the vendor who assisted in the preparation of the refund claim. In many instances, the fees are not refundable unless the IRS audits and disallows the credit.

Announcement 2024-3 requires that the employer repay only 80% of the refund as part of the agreement. In addition, an employer that participates in the program is not required to reduce its income tax wage expense with respect to any of the previously claimed ERC. If the wage expense has already been reduced, a participating employer may file an amended return or Administrative Adjustment Request (AAR).

Interested employers must apply to the ERC voluntary disclosure program by March 22, 2024. If the IRS paid interest on the employer’s ERC refund claim, the employer doesn’t need to repay that interest.

Employers who are unable to repay the required 80% of the credit may be considered for an installment agreement on a case-by-case basis.

Who is eligible to apply for the program?

Any employer who already received the ERC but isn’t entitled to it can apply if the following are also true:

• The employer is not under criminal investigation and has not been notified the IRS intends to commence a criminal investigation.
• The employer is not under an IRS employment tax examination for the tax period for which they’re applying to the voluntary disclosure program.
• The employer has not received an IRS notice and demand for repayment of all or part of the ERC.
• The IRS has not received information from a third party that the taxpayer is not in compliance, nor has acquired information directly related to the noncompliance from an enforcement action.

What action does the employer need to take to apply?

To apply, the employer must first file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, available on IRS.gov. This form must be submitted using the IRS Document Upload Tool. If the employer outsources its payroll to a third party, the third party is required to file the form on behalf of the employer.

If a return preparer or advisor assisted the employer with the ERC claim, the Form 15434 must include the name, address, and phone number of the preparer or advisor who assisted with the ERC claim and provide a description of the services provided by the preparer or advisor.

Employers will be expected to repay their full ERC, minus the 20% reduction allowed through the voluntary disclosure program. Employers who are not able to pay the amount in full will have the option to set up an installment agreement under certain conditions.

After receiving the requested information, the IRS will prepare a closing agreement in accordance with the terms of the settlement. The IRS will not assert penalties or interest related to the underpayment of employment tax attributable to the ERC if the full payment of 80% of the ERC is remitted prior to executing the closing agreement.

How we can help

Contact your CLA tax professional if you are an employer considering whether you may be eligible for the employee retention credit. We can assist in determining eligibility and collecting appropriate documentation to support the claims.

If you are concerned about having filed an improper claim, CLA is here to educate you and equip you with the information you need regarding participation in the IRS voluntary disclosure program.