Taking the Off Ramp: IRS Opens Limited Program To Return Wrongly Received Employee Retention Credits

By Matthew P. Chiarello and Carlene Y. Lowry

The IRS continues to evaluate and process Employee Retention Credit (“ERC”) claims with a focus on inaccurate and ineligible filings. Among its efforts to police the ERC program, the IRS announced a new initiative that permits taxpayers to return ERCs to which the employer is not entitled and avoid audit and penalty.

The short-duration relief, known as the Employee Retention Credit Voluntary Disclosure Program (“ERC-VDP”), will run until March 22, 2024. Under the ERC-VDP, employers that received ERCs for which they were ineligible may self-identify and return 80% of the credits to the IRS (the 20% discount is intended to factor in the portion of the ERC payment lost to the promoter).

To participate in this program, the IRS requires that an eligible taxpayer: (1) apply to the ERC-VDP using a template form; (2) cooperate with the IRS, including providing additional information (e.g., the name and contact information of any advisors or tax preparers who advised or assisted with the claim and details about the services provided, etc.); (3) pay back 80% of the ERC received; and (4) sign a closing agreement. Employers unable to repay the required 80% of the ERC at the time of signing the closing agreement may be considered for an installment agreement on a case-by-case basis. No penalties or interest are generally due on the repayment of the ERCs, but an installment agreement arrangement carries penalties and interest.

In order to be eligible for the ERC-VDP, the employer must meet the following requirements: (i) the employer must not be under criminal investigation and cannot have been notified that it is under criminal investigation; (ii) the employer cannot be under an IRS employment tax examination for the tax period for which it is applying to the ERC-VDP; (iii) the employer cannot have received an IRS notice and demand for repayment of part or all of the ERC; and (iv) the IRS cannot have received information from a third party that the employer is not in compliance and the IRS cannot have acquired information directly related to the noncompliance from an enforcement action.

Employers in receipt of ERCs may wish to consult with tax and benefits counsel to evaluate participation in the ERC-VDP. For more information about the ERC-VDP, including eligibility information, employers may consult a series of FAQs published by the IRS. Additional details about the ERC can be found here, here, and here.  

In addition to the ERC-VDP, a separate program allows certain employers that filed an ERC claim who have not yet received or who have received but have not yet deposited/cashed their refunds to withdraw their submissions and avoid future repayment, interest, and penalties. More information about the ability to withdrawal can be found here.