What Business Owners Need to Know About the Employee Retention Credit Voluntary Disclosure Program (ERC VDP)
January 10, 2024
The Internal Revenue Service (IRS) recently launched its highly anticipated Employee Retention Credit Voluntary Disclosure Program (ERC VDP). Under the ERC VDP, eligible businesses can resolve improper ERC claims without liability for interest or penalties. However, filing under the ERC VDP can be risky, and it isn’t the best option in all circumstances. As a result, before filing, it is imperative that business owners consult with an experienced Texas tax defense lawyer.
What Is the Employee Retention Credit Voluntary Disclosure Program (ERC VDP)?
The Employee Retention Credit Voluntary Disclosure Program is the IRS’s latest attempt to claw back refunds improperly issued under the ERC program. The ERC program was a pandemic-era economic stimulus tool aimed at encouraging businesses to keep their employees on staff. However, until recently, businesses could claim the ERC retroactively, and rampant fraud under the program resulted in an estimated $2 trillion in fraudulent tax benefits.
With the ERC VDP, the IRS is offering eligible businesses the opportunity to resolve their improper ERC claims proactively. Under the terms of the program, eligible businesses can repay 80 percent of their ERC refunds without further liability. As the IRS explains, the benefits of submitting a voluntary ERC disclosure include:
- No obligation to repay the remaining 20 percent of the business’s ERC refund (which remains treated as nontaxable income);
- No obligation to pay interest or penalties due to receipt of an improper ERC refund;
- No obligation to repay any interest received from the business’s ERC refund;
- No obligation to amend the business’s tax returns, and,
- The IRS “won’t examine ERC on your employment tax return for tax period(s) resolved within the terms of the ERC-VDP.”
Clearly, the IRS is encouraging businesses to come forward and resolve their improper ERC claims proactively. Combined, these benefits offer a significant incentive to do so. However, not all businesses qualify, and while the IRS may not be reviewing qualifying businesses’ ERC claims, filing under the ERC VDP does not guarantee protection from IRS scrutiny.
What Are the ERC VDP Eligibility Criteria?
The IRS has outlined five eligibility criteria for the Employee Retention Credit Voluntary Disclosure Program. Businesses must meet all five eligibility criteria in order to file. The eligibility criteria for the ERC VDP are:
- The business claimed the ERC on an employment tax return and received a refund that it has either cashed, deposited or applied to reduce its tax liability;
- The business’s owners “now think that [the business was] entitled to $0 ERC;”
- The business is not subject to a pending IRS audit;
- The business is not subject to a pending IRS Criminal Investigation (IRS CI) inquiry; and,
- The IRS has not notified the business of its intent to reverse the business’s ERC (i.e., via a disallowance letter).
If a business does not meet all five of these requirements, then it cannot file under the ERC VDP and retain 20 percent of its Employee Retention Credit. In this scenario, the business’ owners will need to work with a Texas tax defense lawyer to evaluate the alternatives that are available.
What Are the Risks of Filing Under the ERC VDP?
While filing under the ERC VDP can offer significant benefits for eligible businesses, it can also present significant risks. A key aspect of the ERC VDP is its “voluntary” nature. When a taxpayer voluntarily submits information to the IRS, the information can be used against the taxpayer for enforcement purposes—and, as the IRS makes clear:
“Please note that if you willfully claimed an ERC that is fraudulent, or if you assisted or conspired in such conduct, applying to the ERC-VDP will not exempt you from potential criminal investigation and prosecution.”
In other words, while not included in the IRS’s list of eligibility criteria, non-willfulness is a requirement for securing the benefits of filing under the ERC VDP. If, upon reviewing a business’s filing, the IRS determines that the business’s improper ERC claim was willful, this could lead to an IRS audit or IRS CI criminal investigation. Both types of inquiries present substantial risks, with criminal investigations presenting risks not only for financial liability but for federal imprisonment as well. For example, a conviction under the federal tax evasion statute, 26 U.S.C. Section 7201, carries up to a $100,000 fine ($500,000 for corporations) and up to five years of prison time.
What if You Can’t File Under the ERC VDP?
Let’s say your business doesn’t meet the eligibility criteria listed above. Or, maybe you have concerns about the IRS classifying your business’s fraudulent ERC refund as willful. What are your options if you can’t file under the ERC VDP?
One option for owners of ineligible businesses who don’t have concerns about willfulness is to file for withdrawal. Withdrawal is an option for businesses that claimed, but have yet to receive, invalid ERC refunds. So, if your business hasn’t yet received its refund (and therefore isn’t eligible to file under the ERC VDP), then filing for withdrawal might be your best option. But, filing for withdrawal presents risks as well; so, here too, informed decision-making is critical.
Other potential options range from filing an amended return to submitting a disclosure under IRS CI’s standard Voluntary Disclosure Program. Different circumstances will call for different approaches and warrant different means of resolution. For businesses that cannot afford to repay 80 percent of their ERC refunds, seeking a settlement or offer in compromise (OIC) may be an option as well. To determine which option is best for your business, you should consult with a Texas tax defense lawyer promptly.
Request a Confidential Consultation with a Texas Tax Defense Lawyer
If you have concerns about facing IRS or IRS CI scrutiny related to your business’s Employee Retention Credit, we invite you to request a confidential consultation at Brown Tax, P.C. With offices in Fort Worth, we represent clients in high-stakes federal tax controversies throughout Texas and nationwide. Call 888-870-0025 or send us a confidential message online today.