The Employee Retention Credit (ERC) was a crucial lifeline for businesses during the COVID-19 pandemic, offering significant tax credits to businesses that kept employees on payroll despite the economic challenges. However, with the growing popularity of the ERC, many businesses inadvertently claimed the credit without meeting the full eligibility requirements. In response, the IRS has launched a Voluntary Disclosure Program for businesses that may have improperly claimed the ERC.
With a key deadline in November 2024, businesses that participated in the ERC program have an opportunity to correct any mistakes, avoid potential penalties, and come into compliance.
In this blog, we’ll dive into the details of the IRS Employee Retention Credit Voluntary Disclosure Program, the benefits of participating, and the steps you need to take before the deadline.
What is the Employee Retention Credit (ERC)?
The Employee Retention Credit (ERC) was introduced as part of the CARES Act in 2020 to provide financial relief to businesses during the COVID-19 pandemic. The credit aimed to incentivize businesses to retain employees by offering a refundable tax credit for qualified wages paid during 2020 and 2021. Depending on the size of the business and the specific tax year, the ERC allowed for credits up to $7,000 per employee per quarter in 2021, with a maximum of $21,000 per employee for the year. Many businesses took advantage of this substantial benefit. However, the complex eligibility rules led to some businesses unknowingly making errors in their ERC claims.
Why Did the IRS Launch the ERC Voluntary Disclosure Program?
With businesses filing for billions of dollars in ERC claims, the IRS has found that some companies—whether due to confusion, lack of guidance, or misinterpretation of the rules—have improperly claimed the credit. Common errors include:
* Failing to meet the required gross receipts reduction thresholds.
* Misinterpreting government shutdown rules and using ineligible shutdowns to qualify.
* Claiming the credit for employees whose wages were also covered by Paycheck Protection Program (PPP) loan forgiveness, which is prohibited under IRS regulations. To address these issues and encourage businesses to come forward, the IRS created the ERC Voluntary Disclosure Program, which allows businesses to correct their filings without facing the full brunt of penalties.
Benefits of the Voluntary Disclosure Program
Participating in the IRS Voluntary Disclosure Program can provide significant benefits, especially if you’ve realized that your business may not have fully qualified for the ERC. Key advantages include:
1. Reduced Penalties: By voluntarily coming forward and disclosing any errors or overclaims, you may reduce or avoid penalties that could be imposed if the IRS discovers the mistake during an audit.
2. Avoiding Future Audits: Taking action now can help you avoid the stress, costs, and potential consequences of an IRS audit. Voluntary disclosure demonstrates good faith and can protect your business from further scrutiny.
3. Repayment Options: Businesses that overclaimed the ERC may be required to repay the improperly claimed credits. However, through the Voluntary Disclosure Program, you may be eligible for more manageable repayment terms.
4. Compliance and Peace of Mind: Correcting any mistakes now ensures that your business remains compliant with tax regulations, preventing potential legal or financial issues down the line.
Who Should Consider the ERC Voluntary Disclosure Program? Businesses that should consider participating in the ERC Voluntary Disclosure Program include those that:
* Are unsure if they met the gross receipts decline or government shutdown eligibility tests.
* Claimed the ERC for wages that were also used for PPP loan forgiveness.
* Worked with third-party advisors or companies that aggressively marketed the ERC without fully understanding or explaining the requirements.
* Are aware of miscalculations or errors in their original ERC claims. Even if your business believed it qualified for the ERC, the complex nature of the rules means there’s a possibility that a misinterpretation occurred. Voluntary disclosure offers a way to address these potential issues proactively.
Important Details and Steps for the ERC Voluntary Disclosure Program
If you’re considering the Voluntary Disclosure Program, here are the key steps you’ll need to take:
1. Review Your ERC Claim The first step is to conduct a thorough review of your business’s ERC claims for 2020 and 2021. This includes reviewing your business’s gross receipts, understanding the government shutdown orders you may have used to qualify, and ensuring that any wages claimed for the ERC were not also used for PPP forgiveness. It may be beneficial to work with the tax attorneys at HLG PLLC, who specialize in ERC claims, to ensure accuracy.
2. Determine If You Overclaimed the ERC If you discover that your business did not meet the eligibility requirements for the full ERC claim or claimed the credit for ineligible wages, it’s important to calculate the amount that was improperly claimed.
3. File a new Amended Payroll Tax Return (Form 941-X) Once you’ve determined that an overclaim occurred, you’ll need to amend your Form 941-X for each quarter where an error was made. This form allows you to correct the wages and credits reported.
4. Contact the IRS Voluntary Disclosure Program To formally participate in the Voluntary Disclosure Program, contact the IRS through HLG PLLC and submit the necessary forms to disclose your ERC claim errors. HLG PLLC will work with the IRS to resolve the issue and potentially negotiate a repayment plan if your business owes back taxes.
November 2024 Deadline: Why Timing Matters
The IRS has set a crucial November 2024 deadline for businesses to participate in the Voluntary Disclosure Program. After this deadline, businesses that have improperly claimed the ERC and failed to correct their filings may face more severe penalties, increased interest on the amount owed, and even potential legal action. By acting before the November deadline, you can resolve any errors with reduced penalties and avoid the risk of an IRS audit or enforcement action. The IRS is more likely to be lenient with businesses that voluntarily disclose mistakes rather than those found during an audit.
What Happens If You Don’t Participate? If your business improperly claimed the ERC and does not participate in the Voluntary Disclosure Program, the IRS could discover the error during an audit. In this case, your business could be subject to:
* Penalties: The IRS may impose penalties of up to 25% of the improperly claimed amount.
* Interest: You’ll be required to pay back any overclaimed amounts with interest, which accrues from the date the claim was first filed.
* Increased Scrutiny: If the IRS discovers your error through an audit, it could trigger a broader investigation into your business’s tax filings and financial activities.
* Enhanced audit: the IRS is likely to audit you and your company once it discovers the errors in the ERC filings.
Act Now through the tax attorneys at HLG PLLC to Protect Your Business
The IRS Employee Retention Credit Voluntary Disclosure Program offers small businesses a valuable opportunity to correct ERC filing errors and avoid significant penalties or legal issues.
With the November 2024 deadline approaching, it’s crucial to review your ERC claims, identify any errors, and take steps to disclose and correct them. By participating in the Voluntary Disclosure Program, your business can resolve any ERC-related issues with the IRS, reduce your financial liability, and avoid the risk of future audits. Don’t wait until it’s too late—take action now to ensure your business remains compliant and secure. If you’re unsure whether your business properly claimed the ERC or need help navigating the Voluntary Disclosure Program, schedule a consultation today with the tax attorneys and advisors at Hammond Law Group PLLC. They can help you through the process and ensure that your business meets the November 2024 deadline with confidence.
