As the IRS ramps up scrutiny of Employee Retention Credit (ERC) claims, businesses are urged to review their eligibility and compliance. The new ERC Voluntary Disclosure Program (ERC-VDP) offers an opportunity to correct ERC filing mistakes, reduce penalties, and avoid potential audits.
This article explores how the ERC Voluntary Disclosure Program works, its benefits and the invaluable role tax consultants play in navigating the ERC Audit process.
Why the ERC Voluntary Disclosure Program is Essential
The Employee Retention Credit (ERC) was introduced to support businesses impacted by COVID-19, providing financial relief to companies that retained employees despite economic hardships. However, the detailed and changing eligibility requirements, combined with aggressive marketing by some ERC consultants, led to many businesses unknowingly making ineligible claims.
To help businesses address any potential mistakes, the IRS has introduced the ERC Voluntary Disclosure Program (ERC-VDP), allowing companies to voluntarily disclose errors in ERC claims and repay a portion of the claimed credits. With a deadline of November 22, 2024, this program provides businesses an opportunity to retain part of the ERC funds while correcting compliance issues without risking future audits.
While the ERC Voluntary Disclosure Program helps businesses address past ERC-related issues proactively, understanding the tax implications of the credit is equally important. For a detailed guide on how the ERC affects taxable income and reporting requirements, read our blog on ERC taxable income.
3 Key Features of the ERC Voluntary Disclosure Program
1. Reduced Repayment Requirement
The ERC-VDP allows businesses to repay 85% of improperly claimed ERC funds, instead of the full amount. By retaining 15% of the ERC, businesses have the chance to correct errors while lessening the financial burden of repaying the entire credit.
Example: If a business received $100,000 in ERC funds, it would only need to repay $85,000 under the ERC-VDP, retaining $15,000.
2. Avoidance of Penalties and Interest
Participating businesses are exempt from additional penalties and interest if they disclose their incorrect ERC claims voluntarily. This provision reduces the total financial burden, which could be substantially higher if penalties and interest were imposed after an IRS audit.
3. Audit Protection for Disclosed Claims
The ERC-VDP provides audit protection on disclosed ERC claims. This ensures that claims corrected and disclosed under the program will not be re-evaluated or audited by the IRS, giving businesses the confidence to move forward without future compliance risks.
ERC Voluntary Disclosure Program Eligibility Requirements
To participate in the ERC-VDP, businesses must meet the following eligibility criteria, as outlined by the IRS:
1. Received ERC Payments in Error: The business must have received ERC funds it later determined were ineligible due to IRS guidelines.
2. No Criminal or Audit Investigation: The business must not be under criminal investigation or currently subject to an IRS ERC Audit claim related to the period in question.
3. Tax Filing Compliance: Businesses must have all other federal tax filings up to date to be eligible for the ERC-VDP.
Important Note: Companies that have already received a demand for ERC repayment or that are under active investigation do not qualify for this voluntary disclosure program.
How Tax Consultants Help Navigate the ERC Voluntary Disclosure Program
The process of assessing ERC claims, determining eligibility, and applying for the ERC-VDP can be complex. Here are some of the ways a tax consultant can provide vital support:
Assessing Eligibility and Disclosure Needs
A tax consultant can help a business determine if it meets the ERC-VDP eligibility requirements, evaluate which claims may have been filed in error, and identify any potential benefits of disclosure.
Accurate Repayment Calculations
Calculating the repayment amount for improperly claimed ERC funds requires precision, especially when multiple claim periods are involved. Tax consultants assist by:
•Calculating Total ERC Received: Determining the full amount of ERC funds received.
•Identifying Incorrect Claims: Identifying portions of the claim that do not meet IRS eligibility standards.
•Applying the 85% Repayment Requirement: Ensuring the business meets the 85% repayment condition to retain the allowable 15%.
Preparing Documentation for Submission
Tax consultants ensure that businesses provide all necessary documentation, including payroll records, revenue statements, and government orders affecting operations. Proper documentation supports eligibility and prevents delays in the application process.
Consultant Insight: Organizing documents by quarter and including relevant financial data makes the IRS review process smoother, helping ensure an efficient disclosure experience.
Handling IRS Communications
Navigating the IRS’s documentation and disclosure requirements can be challenging. A tax consultant acts as a liaison with the IRS, managing questions, follow-ups, and any additional document requests, streamlining the entire process and ensuring compliance.
Structuring Payment Plans
If a business cannot make the full repayment upfront, tax consultants can help structure a repayment agreement with the IRS, including installment plans that meet the ERC-VDP requirements. They can also assist in evaluating the financial impact of different repayment options.
3 Steps to Apply for the ERC Voluntary Disclosure Program
Businesses considering the ERC-VDP should follow a structured approach to ensure compliance and accurate reporting:
Step 1: Gather Documentation
Prepare the following documents to support the disclosure application:
•Payroll Records: Documentation of wages paid during the ERC eligibility periods.
•Revenue Statements: Financial records illustrating revenue conditions during these periods.
•Government Orders: Proof of government mandates that impacted business operations and supported the initial ERC claim.
Step 2: Complete Required IRS Forms
Businesses need to complete:
•Form 15434: The primary application form for the ERC-VDP.
•Form 941-X: For each quarter affected by improper ERC claims.
Pro Tip: Ensure all forms are signed accurately, as missing or incorrect signatures can delay the application process.
Step 3: Submit Forms Through the IRS Portal
All application materials should be submitted via the IRS Document Upload Tool. This online submission portal provides a secure way to ensure the timely and accurate delivery of required documentation.
Why Addressing ERC Issues Proactively is Beneficial
Correcting ERC claims through the ERC-VDP offers significant benefits for businesses concerned about compliance:
Financial Savings Through Reduced Repayment
By repaying only 85% of the ERC claim amount, businesses can retain a portion of the funds while avoiding penalties and interest. This financial relief can be essential for companies looking to maintain cash flow stability.
Long-Term Protection Against Audits
The IRS’s audit-free guarantee for disclosed claims prevents future scrutiny of ERC claims, which is a considerable benefit given the intense audit efforts currently underway for ERC compliance.
Simplified Compliance Moving Forward
The ERC-VDP simplifies compliance efforts, allowing businesses to resolve past ERC-related issues and create a stronger foundation for future tax filings. This proactive approach shows the IRS a commitment to accurate, compliant filings.
4 Common Pitfalls to Avoid in the ERC-VDP Process
Several common mistakes can complicate or delay the ERC-VDP application process. Here’s how to avoid these issues:
1. Incomplete Documentation: Ensure all documentation is organized and complete. Missing records are one of the most common reasons for delays.
2. Calculation Errors: Miscalculations in the repayment amount can lead to issues. Working with a tax consultant helps ensure that repayment amounts meet IRS requirements.
3. Improper Signatures: Verify that all required forms are correctly signed to avoid processing delays.
4. Omitting Affected Quarters: Make sure to include all quarters in which improper ERC claims were made. Omitting these can lead to further IRS questions or even rejection of the disclosure application.
Long-Term Compliance Benefits of the ERC Voluntary Disclosure Program
Participating in the ERC-VDP is not only about addressing past claims; it also provides a valuable opportunity for long-term compliance improvements. Here’s how the ERC-VDP supports a sustainable tax strategy:
Improved Documentation Practices
The process of gathering and organizing documentation for the ERC-VDP helps businesses establish better documentation practices, which can enhance their compliance for future tax credits or audits.
Tax Planning Support
Consulting a tax advisor during this process can provide businesses with proactive tax planning insights, helping prevent similar issues in the future and streamlining eligibility assessments for tax credits.
Building Strong Advisor Relationships
Working with a tax consultant on the ERC-VDP builds a valuable relationship for ongoing support and advice on complex tax credits or deductions, which can help prevent compliance issues in the future.
Consultant’s Advice: Developing a long-term partnership with a tax advisor improves accuracy, supports proactive planning, and ensures continued compliance with IRS regulations.
Final Thoughts on the ERC Voluntary Disclosure Program
With the November 22, 2024 deadline approaching, businesses that may have improperly claimed ERC should take prompt action to review their claims, gather documentation, and seek tax consultation as needed. Participating in the ERC-VDP offers a clear path to correct potential compliance issues, retain part of the ERC funds, and protect against future audits.
Tax consultants provide essential guidance in the ERC-VDP process, from determining eligibility to preparing documents and managing IRS interactions. By addressing any errors through this program and building long-term compliance strategies, businesses can secure financial stability and enhance their overall tax position.
