Employee Retention Credit Voluntary Disclosure Program Ends March 22, 2024

The Employee Retention Credit (ERC) is a refundable tax credit for certain eligible business and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic. The ERC Voluntary Disclosure Program is meant to help employers pay back the money they received after incorrectly filing for ERC claims. Businesses who incorrectly claimed the ERC should take advantage of the ERC Voluntary Disclosure program, as employers have to pay back only 80% of the ERC they receive, without worrying about any penalties or interest. Business who claimed the ERC should note that the deadline to take advantage of the Internal Revenue Service’s (IRS’s) Voluntary Disclosure Program is March 22, 2024.

The IRS is urging all employers to review their eligibility for the ERC and to voluntarily correct any mistakes to avoid penalties and interest before the ERC Voluntary Disclosure program ends on March 22, 2024. In order for a taxpayer to have been eligible for the credit, that taxpayer must have:

• Operated a trade or business (or was a tax-exempt organization) that had employees to whom it paid wages between March 13, 2020 and December 31, 2021;
• Experienced the required decline in gross receipts during the eligibility periods in 2020 and 2021;
• Been shut down due to a government order, or;
• Qualified as a recovery startup business for the third or fourth quarters of 2021

Aside from the above tests, the IRS’s question-and-answer tool contains a checklist for ERC eligibility, which can help in avoiding or resolving an incorrect claim. Any business who incorrectly claims the credit who do not take advantage of the ERC Voluntary Disclosure Program must pay it back and may also owe penalties and interest.

If a business has a claim that has yet to be processed or paid and would like to withdraw said claim, they should pursue the ERC Claim Withdrawal Program, which is still available if the taxpayer now understands that their claim is ineligible. Through the ERC Claim Withdrawal Program, the IRS promises to treat the withdrawn claims as if they were never filed. This means that no repayment, penalties, or interest will apply.

The IRS took steps on warning and educating taxpayers about the ERC program after the program came under aggressive marketing that oversimplified or misinterpreted the ERC’s eligibility criteria. The IRS wants businesses to know about the warning signs, and revisit their claim if there are questions. Businesses should act quickly before the special disclosure and withdrawal program ends, as resolving an incorrect claim through these programs can help businesses avoid penalty and interest.

Below please find the seven suspicious signs that an ERC claim could be incorrect, as provided by the IRS:

1. Too many quarters are being claimed. Qualifying for all quarters is uncommon, and could be a sign of an incorrect claim. Taxpayers should carefully review their eligibility for every quarter.

2. Government orders that don’t qualify. Government orders must have been in effect and the employer’s operations must have been fully or partially suspended due to the government order for the period in which they’re claiming the credit. This is perhaps the grayest area. The government order must have been due to the COVID-19 pandemic, and the order must be a government order; not government guidance, recommendation, or statement.

3. Too many employees and wrong calculations. Employers should be cautious about claiming the ERC for all wages paid to every employee on their payroll. The law changed throughout 2020 and 2021. There are dollar limits and varying credit amounts, and the employers need to meet certain criteria for wages to be considered qualifying wages. Taxpayers should carefully review all calculations to avoid over claiming the credit.

4. Business citing supply chain issues. Qualifying for ERC based on a supply chain disruption is very uncommon. A supply chain disruption on it’s own doesn’t mean an employer qualifies for the ERC. An employer needs to ensure that their supplier’s government order meets the requirements. Taxpayers should carefully review the rules on supply chain issues and examples in the 2023 legal memo on supply chain disruptions.

5. Business claiming ERC for too much of a tax period. Although it’s possible, it is not common for an employer to qualify for ERC for the entire calendar quarter if their business operations were fully or partially suspended due to a government order during a portion of a calendar quarter. A business in this situation can claim ERC only for wages paid during the suspension period, not the entire quarter. Businesses should check their claim for overstated, qualifying wages and should keep payroll records that support their claim.

6. Business didn’t pay wages or didn’t exist during eligibility period. Employers can only claim ERC for tax periods when they paid wages to employees. If the business did not have any employees during the time that they claimed the ERC, or if they claimed the ERC during a period in which they did not have an Employer Identification Number (E.I.N.) with the IRS, then those businesses incorrectly claimed the ERC.

7. Promoter says there’s nothing to lose. If a promoter urged a business into claiming the ERC because they have, “Nothing to lose,” the business should be on high alert. There is something to lose for businesses that incorrectly claim the ERC, such as penalties, interest, expenses of hiring someone to resolve the incorrect claim, amend previous returns, or representation in an audit.

There are many resources and tools to learn more about ERC eligibility, such as the IRS’s frequently asked questions about the ERC or the IRS’s interactive ERC Checklist. These tools can help tax professionals and taxpayers check potential eligibility for ERC. The IRS has been urging businesses to revisit their eligibility, and resolve any issues now before March 22, 2024, when the ERC Voluntary Disclosure Program ends.