Walking Back Errors in Employee Retention Claims Calls for Care

On Dec. 21, the IRS announced a much-anticipated voluntary disclosure program for employers that believe they may have erroneously claimed a pandemic-era employee retention credit, or ERC. The initiative contains a key difference from previous forgiveness programs—it has a limited participation window.

Participants in the program, which allows employers to reverse their claims in exchange for penalty and interest relief, must submit a complete application by 11:59 p.m. local time on March 22.

Employers will need to work quickly to evaluate whether they should participate, and gather the necessary information if they wish to move forward. Each employer’s facts will be different, and nothing can substitute the advice of an independent tax professional. But there are several common factors to consider.

Taxpayer-Favorable Terms

The ERC program terms are notably taxpayer-favorable compared to other IRS voluntary disclosure programs. It is designed so taxpayers likely won’t be in a worse position and may actually be in a better financial position, than if they had never claimed the ERC.

The IRS chose the 80% repayment amount because many advisers charged 20% of the amount claimed as a fee. Participating employers won’t be subject to interest or penalties on the amount paid back and won’t be required to amend their income tax returns to reduce their claimed wage expense.

This provides a reasonably attractive option for employers that no longer believe they were eligible to claim the ERC.

Continued Cooperation

The IRS’s seeming benevolence isn’t without strings. Employers making voluntary disclosures must list all individuals, businesses, and organizations that advised them to claim the ERC and describe the services provided.

These attestations will be made under penalties of perjury, and the employer will have an ongoing obligation to cooperate with the IRS, including responding to additional requests for information. Failure to cooperate could lead to a revocation of the program’s benefits and the imposition of civil and criminal penalties.

Employers that choose to participate should be prepared to fully comply with future IRS requests and would be well advised to engage independent tax counsel to interface with the IRS on their behalf.

No Criminal Protection

While the terms of the program will be attractive to many employers, they don’t protect against criminal liability. The IRS has indicated its desire to criminally investigate fraudulent ERC claims and has posited several avenues for criminal liability through potential tax evasion, filing a false return, false claims, or false statements charges.

While coming clean and voluntarily disclosing ineligibility may make future prosecution less appealing to the IRS, employers that willfully lied about key facts when claiming the ERC should be wary about putting a spotlight on their case.

Third-Party Payers

Employers are still eligible if they used a third-party payer to claim the credit, but they’ll need the assistance of the third-party payer in submitting the application.

Many employers used third-party payers to file their employment tax returns that claimed the ERC. These taxpayers still can make a voluntary disclosure, but there’s a catch: The third-party payer must be the entity that files the disclosure application.

In instances where the third-party payer also qualifies as an adviser or return preparer, there could be tension between the information the filer wishes to include and the disclosure requirements. Employers that are presented with this issue should consult with an independent tax adviser to make sure their application is compliant.

Installment Agreements

All program participants must be prepared to fully pay any amount due. The IRS will consider requests for installment agreements on a case-by-case basis, but nothing is guaranteed.

Taxpayers seeking an installment agreement will be required to file a detailed financial disclosure through the submission of a complete Form 433-B, along with all supporting documentation (which can be extensive) with their voluntary disclosure application.

Employers won’t know if their installment request has been granted until they receive a Closing Agreement. If the request has been denied, the taxpayer will have only 10 business days to return the signed closing agreement with full payment. A failure to make full payment within 10 business days could cause the employer to lose the benefits of the disclosure program.

By keeping these issues in mind, employers will be well-equipped to make hard decisions about whether the ERC voluntary disclosure program is right for them.

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