IRS ERC Voluntary Disclosures Program

HOST: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters. Welcome to this edition of the Cherry Bekaert Tax Beat podcast.

The Employee Retention Credit, or ERC, is in the news again. The IRS announced a voluntary disclosure program in December 2023 for employers who filed ERC claims and received refunds or credits to which they were not actually entitled.

The IRS is reaching out to employers who may have been pushed into filing erroneous claims by one of the many ERC mills that have proliferated over the last three years. Joining today’s conversation once again is Marty Caron, Partner and Leader of our Tax Credits and Incentives Advisory practice.

Marty is our ERC leader and pays a great deal of attention to this area. How are you doing today, Marty?

MARTY CARON: I am doing very well. I am in New York City today, and while it is a rainy day, I am happy to be talking about the ERC.

HOST: As always, joining me is my partner in crime, Sarah McGregor, from Greenville. Sarah, how is life treating you?

SARAH MCGREGOR: Life is good. We have had a lot of rain recently, so it is a good day to be an accountant.

HOST: Let’s go ahead and dive in. To provide some background, the ERC was introduced in the CARES Act of 2020.

The philosophy behind it was to encourage employers to keep paying their employees by having the government help finance that pay while businesses struggled with COVID-related issues. There have been numerous legislative and administrative refinements to the ERC along the way.

This area has attracted both good and bad players. Unfortunately, the bad players have received significant attention, leading the IRS Commissioner to place a moratorium on processing new ERC claims.

We still do not know exactly when the IRS will resume processing these claims. In the interim, the IRS has introduced new programs for employers to reconsider their filings. Marty, give us the rundown on the current landscape.

MARTY CARON: To level set, there are currently four distinct employee retention credits. There is one specific to the period from March 13, 2020, through the end of 2020, and there are three more for each of the first three quarters of 2021.

The program provides a benefit to organizations that kept employees on the payroll if the business was harmed by COVID-19 in one of two ways. The first is showing a significant decline in gross receipts, defined as a 50% decline in any 2020 quarter compared to 2019, or a 20% decline in the first three quarters of 2021 compared to 2019.

This is a straightforward test based on overall gross receipts. If you meet these thresholds, you are essentially an automatic qualifier.

The second way to qualify is to show the organization was directly impacted by government orders limiting commerce, travel, or group meetings. This impact must have affected a more-than-nominal portion of the business.

This is the area where many ERC mills have proliferated. The IRS believes these firms talked taxpayers into qualifying with very little documentation regarding exactly which orders were affecting them.

The IRS is concerned that taxpayers were duped into claiming the credit based on bad advice. Consequently, they have created programs to allow employers to give the money back.

HOST: Following the IRS moratorium, they introduced programs for employers who may have filed invalid claims. The first program allows employers to withdraw a claim. Marty, can you talk about that?

MARTY CARON: I categorize these as two programs. The first is for those who have not yet cashed a check, and the second is the Voluntary Disclosure Program for those who have.

The withdrawal program was introduced on October 24, 2023. It allows taxpayers to withdraw an ERC claim if they filed a Form 941-X but have not yet received the money or have received the check but not yet cashed it.

In that case, an authorized person can write "withdrawn" in the left margin of the Form 941-X, sign it, and fax it back to the IRS. Since no cash was received, there are typically no penalties or interest charges.

HOST: And for those who did receive and cash a check, there is a new program that came out in late December. Let's talk about that.

MARTY CARON: This is the most important program and is very taxpayer-friendly. It allows those who have cashed their ERC check to repay the amount minus 20%.

The taxpayer must cooperate with any IRS requests for information, particularly regarding which provider they worked with. They must also sign a closing agreement indicating they no longer believe they qualified for the credit.

The 20% reduction is interesting because many ERC mills charged contingency fees between 15% and 30%. By allowing taxpayers to keep 20%, the IRS makes it easier to pay back the amount they actually have in their pocket.

This program is only available until March 22, 2024. If a taxpayer believes they were not entitled to the credit and they already received the funds, they have until that date to apply for this disclosure.

HOST: So, if an employer received a refund check for $1 million and deposited it, they could potentially pay back only $800,000 to settle the matter? Does this work for every employer?

MARTY CARON: To be eligible, you must show that you claimed the ERC and now believe you are entitled to zero. You cannot be under an employment tax examination or a criminal investigation.

Furthermore, you must not have already received a notice from the IRS disallowing the ERC. This is intended to be a proactive disclosure rather than a reaction to an audit.

I have spoken with taxpayers who did not work with Cherry Bekaert originally but are now interested in this program because they are unsure if they were actually entitled to the funds they received.

HOST: If I am an employer who has already received the money, what should I be evaluating before participating in these programs?

MARTY CARON: First, consider whether you truly qualified under the significant decline in gross receipts test or the government order test. If you did not have a significant decline in receipts, ensure your partial shutdown is well-documented.

The IRS has cited "bad practices" by ERC mills, such as relying solely on generic CDC or OSHA guidance. If that is your only basis for qualification, you should take a second look.

I recommend reaching out to a firm like Cherry Bekaert for an evaluation. Now is the time to look at this, and I would also advise not spending the money until you have made a final determination.

HOST: You mentioned there are credits for 2020 and 2021. Is this an all-or-nothing situation for the disclosure program, or can you apply it to specific quarters?

MARTY CARON: You can look at each credit independently. You can evaluate the 2020 credit separately from the three quarters of 2021. You can make a disclosure and request to return the cash for any or all of those periods.

HOST: What other options are available for employers who are concerned but do not fit squarely into these two programs?

MARTY CARON: Again, hold onto the cash and evaluate your status with a trusted advisor. You can still file an amendment to return the funds by filing another Form 941-X.

In that case, you will likely be subject to interest and potential penalties, which are waived under the Voluntary Disclosure Program. You would also need to amend your income tax returns to restore the wage deductions that were previously reduced by the ERC amount.

Interestingly, under the Voluntary Disclosure Program, if you keep that 20%, there is currently no requirement to reduce your deductions by that retained amount. It is a one-size-fits-all program designed for expediency.

HOST: Cherry Bekaert has been a leader in the ERC space. Now that we are seeing IRS audits, what is your overall assessment? Have there been any surprises?

MARTY CARON: I haven't seen too many surprises. The IRS has been consistent in asking for the government orders that applied, a full accounting of gross receipts, and payroll journals.

They want to ensure there was no double counting and that the number of employees matches what was reported on the original Form 941. We have worked with over 1,200 independent clients, and to date, we have only seen about five direct inquiries from the Service.

I expect the IRS to become more aggressive, particularly focusing on the providers mentioned in the voluntary disclosures. They are essentially building evidence against specific ERC mills.

HOST: There is a deadline approaching. Talk to us about the upcoming dates for ERC claims.

MARTY CARON: We suspect the moratorium on processing will end sometime around the late January. However, the statute of limitations is a separate issue.

The 2020 credit must be filed by April 15, 2024. The 2021 credits currently have a filing deadline of April 15, 2025.

If you believe you have a valid claim for 2020 and haven't filed yet, you must act quickly. We can evaluate your eligibility and file an amended Form 941-X before the April deadline.

HOST: Marty, any final recommendations for our listeners?

MARTY CARON: Even though there was a moratorium on processing, the IRS is still accepting claims. If you are considering this, give us or your trusted advisor a call to get filed before the statute of limitations expires.

Similarly, if you have cashed a check and do not believe you qualify, look into the Voluntary Disclosure Program immediately. The IRS has set up an electronic filing process for disclosures that is very efficient.

SARAH MCGREGOR: It is fantastic that the IRS created these programs to help employers get out of difficult situations. The Voluntary Disclosure Program is particularly reasonable in its approach to making employers whole regarding provider fees. It shows the IRS is serious about both compliance and fairness.

HOST: I have two final comments. First, a moratorium on processing is not a moratorium on the statute of limitations. The April 15, 2024, date for 2020 filings is not affected by the moratorium.

Second, with any new program, there will be good and bad players. I strongly encourage you to find reputable CPAs who are trying to do things the right way. You can get into trouble quickly with overly aggressive marketing firms.

That concludes our discussion on ERC updates. Thank you for listening. Please note that we are not providing tax advice on this podcast; consult with your tax advisor, hopefully at Cherry Bekaert, for your specific issues.

Check out the firm’s website at cb.com for the latest guidance on this and other topics. Please like, share, and subscribe. Thank you, Marty, and thank you to our listeners. Go forth in peace.