The Employee Retention Credit (ERC) has been a lifeline for businesses during the challenges of COVID-19; however, some may find themselves in a situation where they need to repay the ERC due to ineligibility. Fortunately, the Internal Revenue Service (IRS) has introduced the Employee Retention Credit Voluntary Disclosure Program (ERC-VDP) to provide a structured way for entities to voluntarily return the credit and rectify any discrepancies. This blog post will guide you through the critical aspects of the ERC-VDP, including its advantages, eligibility criteria, application process and what happens next.

The ERC-VDP offers several advantages to entities seeking to rectify their eligibility status and voluntarily repay the credit.

  • Repay Only 80 Percent of ERC: Participants in the ERC-VDP must repay only 80 percent of the ERC they received as a credit, providing a measure of relief.
  • No Repayment of Interest: Entities don't need to repay any interest received on their ERC refund, easing the financial burden.
  • No Amendment of Tax Returns: There's no requirement to amend income tax returns to reduce wage expenses, simplifying the process.
  • Non-Taxable 20 Percent Reduction: The 20 percent reduction in the ERC repayment is not considered taxable income.
  • Penalty and Interest Waiver: The IRS will not charge penalties or interest on the claimed ERC amount if paid in full (claimed ERC minus 20 percent) when the signed closing agreement is returned to the IRS.
  • Examination Exemption: The IRS won't examine ERC on your employment tax return for tax periods resolved within the terms of the ERC-VDP.

Entities eligible to apply for the ERC-VDP must meet specific requirements:

  • ERC claimed on an employment tax return has been processed and paid as a refund or applied as a credit.
  • The belief that the entity was entitled to $0 ERC.
  • Not under employment tax examination or criminal investigation by the IRS.
  • No reversal or intent to reverse ERC to $0 by the IRS.

It's crucial to note that applying to the ERC-VDP does not exempt entities from potential criminal investigation and prosecution if there was willful, fraudulent ERC claiming or involvement in such conduct.

If you meet the eligibility rules, you must prepare and submit an application to the IRS for consideration. Applications must be submitted before March 22, 2024.

After submitting your application, the IRS will review and verify your eligibility for the ERC-VDP. The IRS will provide reasons and potential solutions if the application is rejected. Entities may correct errors, resubmit their ERC-VDP application or file an amended employment tax return.

The ERC-VDP provides a structured and advantageous approach for entities to rectify ERC discrepancies voluntarily. As the program is open until March 22, 2024, eligible entities should consider this opportunity to comply with IRS regulations and mitigate potential financial impacts. Due to the complexity of the process, you should consider the use of a trusted professional to assist in the preparation of your application. If you would like to learn more about this or discuss how we can help you with your application, please contact a member of the RCIS team.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.