IRS Gives Employers a Short Window to Correct Erroneous ERC Claims

Author: Rena Pirsos, Brightmine Legal Editor

January 2, 2024

The IRS is giving employers the chance to resolve erroneous claims made for a credit or refund of the COVID-19-era Employee Retention Credit (ERC).

The ERC Voluntary Disclosure Program – or ERC-VDP, for short – applies to employers that received and cashed an ERC refund check from the IRS when they were not eligible to receive the ERC and cannot now withdraw the Form 941-X on which they claimed the credit. The program is also available to employers that claimed the ERC on Form 941.

Employers that want to take advantage of the program must act quickly. The ERC-VDP expires on March 22, 2024.

The ERC-VDP settles an employer's ERC liability, while allowing it to retain 20% of the claimed ERC amount as compensation for receiving faulty advice regarding their eligibility for the ERC. To participate in the ERC-VDP, an employer must pay back 80% of its entire ERC and meet certain criteria.

An employer must also file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, along with various attachments (if applicable). Employers are encouraged to estimate the ERCs they are paying back and prepay with Form 15434 to speed up the IRS's review process. An employer that is unable to pay back its ERC in full may qualify for an installment agreement; however, paying in installments will make the employer liable for penalties and interest.

Participating in the program also settles an employer's liability with the IRS so that the employer does not have to make any further adjustments to its related employment or income tax liability; the IRS will make any required adjustments automatically. In addition, the employer will not be liable for penalties or interest if it pays back the full amount received by the time it signs an ERC-VDP closing agreement.

Many employers filed claims for the ERC to which they were not entitled after being lured into aggressive scams run by so-called ERC mills that advertised their ability to obtain the ERC for employers on social media. These scams are so pervasive that in September 2023, the IRS announced that it would immediately stop processing new ERC claims through at least December 31, 2023, to help protect businesses.

Then, this past December, to prevent further improper ERC payments from being made to ineligible entities, the IRS further announced that it would send out an initial round of more than 20,000 letters to taxpayers notifying them of disallowed ERC claims involving entities that did not exist or did not have paid employees during the period of eligibility.

All ERC-eligible employers may still claim the original and amended credit retroactively - for the period March 13, 2020, through September 30, 2021, for most employers; or through December 31, 2021, for recovery startup businesses - on IRS Form 941-X. The ERC expires for all employers filing Form 941-X on April 15, 2025.