IRS announces second phase
ERC amnesty program
By Nick Pantaleo
February 1, 2024
On Dec. 21, 2023, the IRS released a new program allowing businesses that incorrectly filed for — and received — an Employee Retention Credit (ERC) refund to return 80% of the funds without interest or penalties. If your client filed for ERC and now believes they shouldn’t have qualified, they can return 80% of the amount received without penalty or audit risk. That’s the good news. Just don’t let them execute the return without consulting with you first.
While an employer that withdraws a claim will not be subject to penalties and interest on an incorrect ERC refund, the IRS says taxpayers that willfully filed a fraudulent claim — and those who assisted or conspired with them in such conduct — should know that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.
Also, according to the IRS, a withdrawal request is valid only if it is accepted by the IRS. This indicates that the IRS could reject withdrawal requests. The IRS has not indicated under which circumstances it will reject a withdrawal request.
Considerations and next steps
If you have clients thinking of returning all (or a portion) of their ERC refund, the IRS has provided
specific next steps to take dependent upon your client’s specific fact pattern.
But the window for application closes on March 22, 2024, and likely won’t be extended.
By allowing employers to retain 20% of their refunds, the withdrawal allows employers that have uncertain ERC eligibility positions — particularly if they utilized an unqualified provider — to come forward and return amounts received with limited cost to their organizations.
As the IRS states: “The new disclosure program, which has been in the works for several months, is part of a larger effort at the IRS to stop aggressive marketing around ERC that misled some employers into filing claims.”
Which businesses are eligible to utilize the ERC second phase amnesty program?
To be eligible for the ERC amnesty program, businesses must meet each of the criteria below:
- The participant is not under criminal investigation, and they have not been notified that the IRS intends to commence a criminal investigation.
- The IRS has not received information from a third party alerting it to the participant’s noncompliance. Nor has the IRS acquired information directly related to the noncompliance from an enforcement action.
- The participant is not under an employment tax examination by the IRS for any tax period(s) for which the taxpayer is applying for this Voluntary Disclosure Program.
- The participant has not previously received notice and demand for repayment of all or part of the claimed ERC.
Note: If your client’s business willfully filed a fraudulent claim or conspired to do so, the amnesty program does not relieve them of potential legal action. Also, if the business was a client of a Professional Employer Organization (PEO) during the period of the refund request, and the PEO filed the adjusted return to claim the benefit, the business must consult with the PEO on its ability to enter into the withdrawal program.
What should businesses do if the IRS rejects their claim?
If your client’s business was not selected due to breaching of any of the four criteria above — or simply wasn’t selected for the refund program (we don’t know if there is any limit) — they need to assess whether they are qualified for the ERC claim. If they are not entitled to the ERC, they still need to return the funds, or withdraw their claim if the funds have not yet been received. They just aren’t eligible to keep their 20% portion of the funds.
How does an employer request IRS amnesty consideration?
The process for withdrawal is initiated by the completion of
IRS Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program
. Requirements and details for completion of the application include:
- The taxpayer’s name, taxpayer identification number, current address and daytime telephone number. If a practitioner will represent the taxpayer, the practitioner must provide a completed Form 2848, Power of Attorney and Declaration of Representative.
- Identification of the tax period(s) for which the ERC was claimed, the form on which the ERC was claimed and the full amount of the ERC claimed, including both the amounts that were refundable and non-refundable.
- If the tax period(s) for which the ERC was claimed include any tax period ending in 2020, a completed, signed ERC Voluntary Disclosure Program Form SS-10, Consent to Extend the Time to Assess Employment Taxes, for the 2020 Tax Period(s), is required to be submitted with Form 15434.
- If the ERC was claimed by a third-party payer on behalf of the participant, as described in Section 2, the third-party payer must attach a copy of the relevant pages of the Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, that was attached to each Form 941, Employer’s Quarterly Federal Tax Return, on which the third-party payer claimed the ERC for the participant.
- If a return preparer or advisor assisted with the claim for credit or refund, include the name, address and phone number of the preparer(s) and advisor(s) who assisted with the claim for credit or refund and a description of services provided by the preparer or advisor.
- The Form 15434 completion will provide details as to the calculation of the amount to be returned and the method of return, potentially including a payment plan, and:
- The taxpayer will be required to enter into a closing agreement with the IRS asserting all facts and circumstances regarding the settlement.
The well-intended ERC program has been afflicted by confusion and misinformation since being launched during a tumultuous period in our nation’s history. Fraudsters and other less-than-ethical providers took advantage of that confusion and billions of dollars in relief aid was doled out with few considerations attached.
This extension of the amnesty program for taxpayers who have received ERC refunds appears to be the next step for the IRS to reduce its claim backlog and to address concerns with potentially ineligible ERC claims filed.
Again,
the window for application closes on March 22, 2024, so don’t delay. Again, we don’t think this deadline will be extended.
The service is taking an aggressive stance on this matter, including the new proposed legislation to end ERC early. IRS understands that many of the unscrupulous ERC providers took advantage of companies that did not understand their eligibility thoroughly. The IRS has been vocal in many efforts to control this abuse and urges companies to come forward. We believe audits will begin, especially considering that the same legislation that proposes ending ERC early is proposing a six-year audit statute, as opposed to the normal three years and extended five-year statute already in place.
Moving forward with the right information
Make sure you and your clients have a thorough qualification process in place and relate everything to a specific state or local mandate, or drop in gross receipts, to qualify.
Don’t base your claim on vague mentions of COVID, the economy or national orders. At Tri-Merit, we document the nominal analysis about whether we can say per the IRS guidance that there is an impact to your business. You need all parts of it; you can’t just have a mandate without impact. And you can’t have an impact from Covid without a mandate.
We will make an independent determination about the period of qualification which you can use to help determine whether you filed an erroneous claim. If so, we will help walk through the steps for the amnesty program submission or withdrawal program if credits have not yet been received.
Nick Pantaleo is a partner and the chief financial officer at Tri-Merit.
