ERC-VDP: Understanding the Second Employee Retention Credit Voluntary Disclosure Program

The IRS’s new Second Employee Retention Credit Voluntary Disclosure Program (ERC-VDP) offers a unique opportunity for businesses to resolve errors related to the Employee Retention Credit (ERC). For businesses that may have claimed ERC funds without fully meeting the complex eligibility requirements, this program provides a way to correct mistakes while avoiding penalties, interest, and the risk of future audits. Businesses must take action by November 22, 2024, to participate.

Why the ERC-VDP Matters to Businesses

The Employee Retention Credit (ERC) was introduced during the COVID-19 pandemic as part of federal relief efforts to help businesses retain their workforce during economic uncertainty. However, the detailed eligibility criteria, combined with heavy marketing from some ERC advisors, has led many companies to claim credits that they might not have qualified for.

For businesses that realize their ERC claims may have been made in error, the ERC-VDP provides a structured way to address these mistakes. This program allows companies to voluntarily disclose any incorrect ERC claims and repay only 85% of these funds, while retaining 15%. Furthermore, it offers an audit-free guarantee for all disclosed ERC claims, which can prevent potentially costly and time-consuming IRS examinations.

Understanding ERC-VDP Eligibility Requirements

To qualify for the ERC-VDP, businesses must meet specific eligibility criteria that focus on voluntary error correction and compliance with overall IRS filing requirements:

1. Received ERC Payments in Error: The program is open to businesses that received ERC funds they were not entitled to due to honest mistakes or misinterpretations of eligibility.
2. No Fraudulent Intent: To participate, businesses must certify that errors were unintentional and not based on fraud. This program is intended for businesses looking to correct mistakes voluntarily.
3. Filing Compliance: All federal tax returns must be filed to participate in the ERC-VDP. This ensures businesses are up-to-date with their general tax obligations.

Note: Companies currently under IRS criminal investigation or an ERC audit do not qualify for the ERC-VDP. This program is solely for businesses aiming to proactively correct mistakes, not those already being investigated for ERC-related issues.

Which Industries Are Most Affected?

Although the ERC-VDP is available to all businesses that may have improperly claimed ERC, certain industries have encountered specific challenges in interpreting eligibility. These industries have experienced higher rates of improper claims due to complex, industry-specific operational issues during the pandemic:

Restaurants and Hospitality

The restaurant and hospitality sectors faced a range of challenges, with many businesses operating under reduced capacity or restricted hours. Some restaurants claimed ERC based on reductions in hours rather than government-mandated closures, leading to potential inaccuracies in claims.

Construction

Construction companies often experienced project delays, but many remained operational. Some businesses in this sector interpreted project pauses or supply chain issues as grounds for ERC eligibility, which may not align with the ERC’s criteria.

Healthcare Providers

Healthcare providers, designated as essential services, faced challenges in determining eligibility. Some clinics remained open but adjusted hours or staffing, leading to confusion over whether they qualified for ERC.

Retail and Professional Services

Retailers and professional services firms had to navigate customer restrictions and fluctuations in revenue, which caused misunderstandings around ERC qualifications. Many claimed ERC based on lower foot traffic or client demand rather than clear shutdown orders or substantial declines in revenue.

Key Benefits of Participating in the ERC-VDP

Businesses that choose to participate in the ERC-VDP gain several significant financial and operational advantages:

1. Retention of 15% of Claimed Funds: Unlike traditional IRS penalties, the ERC-VDP requires businesses to repay only 85% of incorrectly claimed ERC funds. This allows businesses to retain a portion of the credits they initially claimed, providing a substantial financial benefit.
2. Avoidance of Penalties and Interest: By voluntarily disclosing errors, businesses can avoid penalties and interest that might otherwise apply if the IRS discovered these claims during an audit. This benefit reduces the financial strain and potential complications from backdated penalties and interest.
3. Audit Protection: Participation in the ERC-VDP protects businesses from future audits related to disclosed ERC claims, offering peace of mind that the IRS won’t revisit these specific ERC issues. This audit-free guarantee lets businesses focus on their future operations without concern about further IRS scrutiny over their ERC claims.

Example: Suppose a business claimed $100,000 in ERC but realizes the entire amount was based on misinterpreted eligibility. Under the ERC-VDP, the business would repay $85,000, retaining $15,000 as a benefit while avoiding penalties, interest, and future audit risk.

Step-by-Step Guide to the ERC-VDP Application Process

Applying for the ERC-VDP involves multiple steps to ensure accurate reporting and eligibility confirmation. Below is a streamlined guide to help businesses navigate this process:

Prepare Documentation

• Gather All Relevant Documentation: Collect all materials related to the initial ERC claims. This includes payroll records, revenue statements, and any government orders or mandates affecting operations.
• Forms Needed: The core forms required are:
• Form 15434: Specific to the ERC-VDP
• Form 941-X: For each quarter in which ERC claims were made incorrectly

Submit Through IRS Electronic Portal

• Ensure that all information on the forms is accurate and complete. Once forms are filled out, submit them along with supporting documentation through the IRS’s electronic submission portal.

Pro Tip: Make sure all forms are signed appropriately, as improper signatures can lead to delays in processing. Keep copies of everything submitted, as this documentation may be helpful if any issues arise during processing.

Calculating the Correct Repayment Amount

Calculating your repayment is a key part of the ERC-VDP process. Here’s how to determine the correct amount:

1. Total ERC Received: Review records to calculate the total amount received in ERC.
2. Identify Incorrectly Claimed Portions: Determine which portions of the ERC claim were incorrectly made based on IRS eligibility guidelines.
3. Apply the 85% Repayment Requirement: Calculate 85% of the incorrect claims as the repayment amount, allowing you to retain the remaining 15%.

Example Calculation: If a business received $200,000 in ERC and later identifies $150,000 of this as incorrectly claimed, they would repay 85% of $150,000 or $127,500, while retaining $22,500.

Timeline and Processing Expectations

The ERC-VDP’s November 22, 2024 deadline may seem distant, but preparing a complete and accurate disclosure takes time. Here’s a breakdown of the timeline and what businesses can expect:

1. Initial Processing: After submission, initial processing generally takes 30-45 days. During this stage, the IRS reviews forms and documentation for completeness and accuracy.
2. Final Determination: A final decision on the ERC-VDP application typically follows within 60-90 days. If accepted, the IRS will establish payment arrangements based on the amount owed.

Note: The IRS offers flexible payment arrangements, allowing businesses to schedule repayments if paying the full amount upfront is not feasible.

Working with a Tax Professional

Due to the complexities involved in ERC regulations and the ERC-VDP application process, many businesses find it beneficial to work with a tax professional. Here’s how tax professionals can help:

1. Evaluate Eligibility and Necessity for Disclosure: A tax advisor can help determine whether the ERC claims meet the criteria for disclosure and calculate the potential repayment amount.
2. Prepare Documentation Packages: Tax professionals can assist in organizing all necessary documentation and ensuring that forms are accurately completed.
3. Navigate IRS Communications: A tax professional can act as a liaison with the IRS, managing any follow-up questions or clarifications directly with the agency.

Reminder: Working with a tax professional not only aids in the ERC-VDP process but also establishes a framework for assessing future tax credit opportunities and ensuring ongoing compliance.

Common Mistakes to Avoid in the ERC-VDP Process

Several common errors can lead to complications or rejections of ERC-VDP applications. Here’s what to avoid:

1. Incomplete Documentation: Missing documents are one of the most frequent reasons for processing delays. Ensure all required materials are submitted.
2. Inaccurate Calculations: Missteps in repayment calculations can cause complications. Double-check all repayment calculations to ensure accuracy.
3. Omitting Quarters: Make sure all quarters with incorrect claims are included. Omitting a quarter could prompt IRS questions or rejection.
4. Improper Signatures: Verify that all forms are signed according to IRS guidelines. Missing or incorrect signatures can lead to delays.

Final Tips for ERC-VDP Disclosure Preparation

Preparing for ERC-VDP disclosure takes planning and attention to detail. Here are a few steps to get started:

1. Review ERC Claims Thoroughly: Reconstruct the eligibility and documentation behind each claim to identify any areas where requirements might not have been met.
2. Organize Documentation by Quarter: Compile payroll and revenue records, organizing by quarter to make it easier for the IRS to review.
3. Take Action Early: Starting early allows more time to resolve potential issues, especially if the IRS requires additional information.

Long-Term Compliance Tip: Use this disclosure as an opportunity to strengthen your business’s tax compliance practices. Consider implementing stronger documentation protocols and consulting with tax professionals before making large claims or deductions in the future.

Moving Forward: Why Early Action Matters

With the November 22, 2024 deadline approaching, it’s crucial for businesses to assess their ERC claims, gather documentation, and consult tax professionals as needed. The ERC-VDP offers a clear path to resolve potential compliance issues, retain 15% of claimed funds, and avoid penalties or audits.

If you suspect your business claimed ERC in error, taking early action is essential. Participating in this program provides financial benefits, secures compliance, and prevents the risk of future audits.

In Summary: The ERC-VDP is an important opportunity for businesses to ensure tax compliance and financial security. With the right preparation and guidance, businesses can navigate the ERC-VDP effectively and focus confidently on future growth.