Navigating ERC Repayment, Correcting Errors, and Understanding Consequences: A Comprehensive Guide

The Internal Revenue Service (IRS) has recently introduced significant measures aimed at addressing potential issues related to the Employee Retention Credit (ERC), a vital pandemic-relief tax credit. This comprehensive guide explores the IRS’s new voluntary repayment option, delves into the consequences associated with incorrect ERC claims, and outlines proactive steps businesses can take to rectify errors and ensure compliance.

IRS Offers Repayment Option for ERC

In response to the widespread utilization of the ERC during the pandemic, the IRS has rolled out a voluntary repayment option for eligible employers. This initiative allows businesses to return 80% of the credited amount, providing a pathway to escape heightened scrutiny and potential penalties. The ERC, designed to encourage employers to retain workers during pandemic disruptions, offered up to $26,000 per worker, leading to the emergence of a mini-industry assisting employers in claiming the credit through amended tax returns.

Background: Understanding ERC Significance

Established in 2020, the ERC aimed to incentivize employers to maintain their workforce during pandemic disruptions by providing significant financial relief. The popularity of the ERC led to the emergence of a specialized industry assisting employers in claiming the credit through amended tax returns.

Repayment Plan: Key Details

To address concerns about potentially fraudulent or ineligible claims, the IRS is introducing a limited-time ERC repayment plan. Eligible employers, who no longer believe they qualify for the ERC, can repay 80% of the credited amount, effectively returning the net funds received. This partial repayment option aims to accommodate fees (around 20%) charged by firms that assisted employers in claiming the credit. IRS Commissioner Danny Werfel emphasizes this as a time-sensitive opportunity for businesses to voluntarily rectify any potential errors in ERC claims.

Program Details and Eligibility Criteria:

To qualify for the 80% repayment option, businesses must adhere to specific criteria outlined by the IRS:

• Employers must notify the IRS of their intent to participate by March 22.
• Participating employers must provide details about the ERC firms they utilized, aiding the IRS in gathering information on promoters.
• Qualification for the 80% repayment requires employers not to be under criminal investigation or an employment tax audit.
• Employers won’t be charged interest on the credited amount, and they do not have to repay any interest received with their ERC payments.
• While civil penalties will not be imposed, it’s important to note that there is no amnesty from criminal prosecution.

IRS’s Focus on ERC Firms

By offering this repayment option, the government aims to streamline its caseload and shift focus toward ERC firms that may have exploited the program beyond its original intent. The IRS remains committed to holding promoters accountable for any manipulation or abuse of the program.

Consequences of Incorrect ERC Claims: A Comprehensive Overview

Given the widespread utilization of ERC programs, the IRS is intensifying efforts to scrutinize claims, leading to audits and penalties for erroneous or fraudulent applications.

Understanding ERC and Associated Penalties:

ERC penalties include various categories, each with its specific implications:

• Failure-to-Deposit Penalty (10%): Applicable when payroll taxes are deposited late.
• Failure-to-Pay Penalty (.5% per month): Incurred for late payment, it can accumulate up to 25% of the unpaid balance.
• Accuracy-Related Penalty (20%): Applied when the IRS believes negligent underreporting occurred.
• Fraud Penalties (75%): Enforced in cases of fraudulent claims.

The magnitude of ERC penalties can be substantial, potentially posing a significant threat to businesses, especially considering the maximum value of the ERC per employee in 2021 was $28,000.

Signs of an Erroneous Claim:

Identifying whether an ERC claim is erroneous requires careful consideration. Certain indicators suggest potential issues:

• Utilization of ERC-focused firms rather than traditional CPA or legal tax firms.
• Claim eligibility asserted before understanding the specific situation.
• Engagement with salespeople instead of CPAs or tax attorneys.
• Charging a percentage of the credit as a fee, often around 25% for ERC mills.
• Discovery through aggressive advertising campaigns, particularly on social media.
• Boasting about processing a high volume of ERC credits.
• Lack of a substantial decline in revenue during the pandemic, coupled with no government restrictions on business operations.

Actions for Businesses with Erroneous ERC Claims:

If concerns arise about the legitimacy of an ERC claim, several actions can be considered such as withdrawing the ERC Claim:

Long-Term Considerations and Conclusion:

Given the complexity of ERC-related issues, seeking assistance from an experienced tax attorney is crucial. The IRS has extended the statute of limitations on some payroll tax returns with ERC claims, allowing audits until April 15, 2027, for Q3 and Q4 2021 returns.

IRS Launches Voluntary Disclosure Program for ERC Repayment

In an ongoing effort to tackle questionable ERC claims, the IRS has introduced a Voluntary Disclosure Program. Aimed at assisting businesses that wish to rectify erroneously filed ERC claims, this initiative is part of the IRS’s broader strategy to curb misleading marketing practices surrounding the ERC. The disclosure program, in development for several months, allows businesses to repay 80% of the received claim. Notably, it extends until March 22, 2024, providing a financial relief option for those who realize they incorrectly applied for the credit.

Key Features of the ERC Voluntary Disclosure Program:

• Application Deadline: Interested employers must apply by March 22, 2024.
• Repayment Percentage: Accepted participants will repay only 80% of the ERC claim received.
• Interest Waiver: Employers won’t need to repay the interest portion of their ERC refund claim.
• Installment Agreements: Those unable to repay the full 80% may qualify for installment agreements, subject to conditions outlined in Form 433-B.
• Information Submission: Employers must furnish names, addresses, and details of advisors or tax preparers who assisted with the claim.

The 80% repayment figure aligns with ERC promoters’ typical fee structures, reflecting the partial amounts received due to upfront or time-of-payment charges. The program’s intent is to facilitate corrections while gathering information on promoters who contributed to misleading ERC claims.

Qualifications for ERC Voluntary Disclosure Program:

• To be eligible, employers must meet the following criteria:
• Not under criminal investigation.
• Not undergoing an IRS employment tax examination for the relevant period.
• Not received an IRS notice and demand for ERC repayment.
• No information received from third parties indicating noncompliance.

Application Process:

Employers must submit Form 15434, “Application for Employee Retention Credit Voluntary Disclosure Program,” available on IRS.gov. If employers outsource payroll responsibilities, the third party must file the form. Program details, including FAQs, are outlined in Announcement 2024-3 on IRS.gov.

Post-Application Steps:

Upon approval, the IRS will send a closing agreement to be signed by the employer. The 80% repayment must be made through the Electronic Federal Tax Payment System (EFTPS). If unable to pay in full, employers may explore installment agreements, with penalties and interest applicable under standard terms.

Ongoing ERC Initiatives:

The Voluntary Disclosure Program supplements the IRS’s broader ERC initiatives, encompassing audits, criminal investigations, and denial letters. The agency recently initiated tax adjustments for up to 20,000 employers with erroneously claimed ERC, specifically for tax year 2020. Commissioner Danny Werfel emphasizes the disclosure program’s importance for well-intentioned businesses caught in erroneous claims. The program’s 80% repayment option aims to alleviate concerns about repaying the full amount, particularly for those misled by promoters.

Conclusion

The IRS reminds employers of the ongoing withdrawal option for pending ERC claims, available until at least year-end. Designed to assist businesses misled by ERC marketers, this option ensures claims are treated as if never filed, with no penalties or interest imposed. As the IRS remains vigilant against ERC fraud, businesses are encouraged to exercise caution and seek professional guidance in navigating the ERC landscape. Properly claimed, the ERC serves as a valuable tax credit for businesses weathering the challenges posed by the COVID-19 pandemic. Swift and informed action is crucial in addressing concerns about erroneous ERC claims, and businesses should seek guidance from professionals well-versed in ERC regulations. The intricate nature of these matters requires careful navigation to ensure compliance and mitigate risks. The Timothy S. Hart Law Group, P.C., stands ready to provide expert assistance in addressing ERC audits, penalties, and related challenges. Contact us today for high-quality support tailored to your specific situation.