IRS Issues Guidance for Paying Back Erroneous ERC Funds

In late December, the IRS issued new guidance under Announcement 2024-3 for employers that claimed and received the Employee Retention Credit (ERC) but were ineligible and applied in error, likely prompted by a third-party promoter. The program is called the Voluntary Disclosure Program and allows employers to pay back only 80% of the total ERC, interest free (if paid by the agreement date).  

Additional details are as follows:

• The deadline for applying through this program is March 22, 2024.
• Participants are eligible if they have already received the ERC refund and are not under criminal investigation or employment tax examination, not considered to be noncompliant, and have not previously received notice that they must repay the ERC.
• As mentioned above, only 80% of the credit received must be repaid and no interest payment is required. Additionally, participants are not required to reduce wage expense on tax returns. If they have previously amended returns to reduce wage expense, they can again amend returns to revert the changes and not reduce wage expense by any amount of the ERC.
• Employers unable to pay the full 80% can request an installment agreement plan by including Form 433-B in the application package. The IRS will review and approve or deny. Interest may apply in this case.
• To apply for the Voluntary Disclosure Program, the procedures below must be followed:
  • File Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program via the Document Upload Tool at irs.gov/DUT.
  • Include the taxpayer name, taxpayer identification number, current address, and daytime telephone number.
  • Identify the tax period(s) for which the ERC was claimed, the form number on which it was claimed (941 or 7200), the full amount of the ERC claimed, and the amounts that were refundable and non-refundable.
  • Include a signed Form SS-10, Consent to Extend the Time to Assess Employment Taxes if any periods end in 2020.
  • Include the name, address, phone number, and services provided of any return preparer or advisors that assisted with the initial ERC claim.
  • Use EFTPS to pay the amounts calculated from Form 15434. Payments should be separated by each tax period. “Advanced Payment” should be selected as the payment category.
• After the above information is submitted, the IRS will prepare and mail a closing agreement. The payment of 80% of the ERC should be made by the date of this agreement. The closing agreement must be signed and returned to the IRS within 10 days of the date of mailing by the IRS.
• If a participant uses a third-party organization to process their payroll and apply for the ERC, such as a professional employer organization (PEO), the third-party/PEO is required to file the Form 15434 and include a copy of the Schedule R of the 941 on which the ERC was claimed for the participant.

Participants in the Voluntary Disclosure Program will be required to sign a closing agreement drafted by the IRS. Payment of 80% of the claimed ERC must be remitted by the date of execution of the agreement. There could be opportunities for installment payments under certain circumstances.

Announcement 2024-3 highlights two additional items that participants need to be aware of.

1. If the application for participation in the program is denied, there is no right to administrative appeal or judicial review, and;
2. By entering into the closing agreement, the IRS will not assert civil penalties related to the underpayment of employment tax if full payment of 80% of the claimed ERC is made prior to the execution of the agreement. However, the agreement does not preclude the IRS from pursuing associated criminal conduct or recommending prosecution for violation of any criminal statute. The agreement does not provide any immunity from prosecution. 

Because of the limitations associated with entering into the agreement, it is recommended that taxpayers contact legal counsel before entering into a closing agreement under the Voluntary Disclosure Program.

As a reminder, there is also a separate withdrawal process for employers who have erroneously claimed the ERC but have not yet received the funds. As of early December, businesses have withdrawn more than $100 million in pending claims from the IRS.

Helpful links:

• Announcement 2024-3
• IRS: New Voluntary Disclosure Program lets employers who received questionable Employee Retention Credits pay them back at discounted rate; interested taxpayers must apply by March 22  
• About Form 15434, Application for Employee Retention Credit (ERC) Voluntary Disclosure Program

Please contact your Yeo & Yeo advisor if you have questions or need assistance.