IRS: Taxpayers can repay ERC refunds claimed in error
By: Ron Kuyath, Consultant
The IRS released information (Announcement 2024-3 and News Release IR-2023-247, December 21, 2023) regarding a Voluntary Disclosure Program (VDP) for taxpayers who applied for and received Employee Retention Credit (ERC) refunds in error and now want to return those amounts. The ERC is a refundable tax credit intended for businesses and tax-exempt organizations that continued paying employees during the COVID-19 pandemic and met certain conditions.
The IRS believes many taxpayers were given erroneous advice from aggressive marketing campaigns to file ERC refund claims. The Voluntary Disclosure Program, which is open through March 22, 2024, allows taxpayers to repay 80% of the refunds received in error. (Because many taxpayers paid fees for assistance in obtaining the ERC refunds, the discount is intended to encourage repayment.) In addition, no interest or penalties will be assessed on the refunded amounts if paid in full upon IRS acceptance.
In summary, here are the ERC-VDP requirements and other pertinent information:
Any employer who already received an ERC for a tax period but isn’t entitled to it can apply if the following conditions are also true:
- The employer is not under criminal investigation and has not been notified that they are under criminal investigation.
- The employer is not under an IRS employment tax examination for the tax period for which they’re applying to the VDP.
- The employer has not received an IRS notice and demand for repayment of part or all of the ERC.
- The IRS has not received information from a third party that the taxpayer is not in compliance or has not acquired information directly related to the noncompliance from an enforcement action.
To apply, taxpayers must first file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, available on IRS.gov no later than March 22, 2024. After Form 15434 is submitted, an IRS employee will contact the taxpayer to go over the application and cover any questions.
If a taxpayer had payroll outsourced and the third party reports, collects, and pays using the third party’s Employer Identification Number, the third party will need to submit Form 15434.
If a return preparer or advisor assisted or advised the taxpayer with any portion of the refund claim, the taxpayer must provide the name, address, and phone number of any preparers or advisors who assisted with the refund claim and provide a description of the services provided.
If the IRS approves the application, they will mail the taxpayer a closing agreement. Taxpayer must then repay 80% of the ERC refund for each applicable quarter using the Electronic Federal Tax Payment System (EFTPS). If the taxpayer is unable to pay the full 80% amount, they may request to enter into an installment agreement with the IRS to pay over time. However, under an installment agreement the taxpayer will also have interest and penalty charges.
Frequently asked questions about the program are listed on IRS.gov. For example, Question and Answer #5 explains the penalties for failure to comply:
Q5. What happens if I don’t participate in ERC-VDP?
A5. The IRS continues to identify new methods of analyzing ERC claims to identify ineligible taxpayers. If you claimed and received ERC you’re not entitled to, and you don’t participate in ERC-VDP to correct it, you risk detection by the IRS, which could lead to substantial interest and penalties and increase your risk of criminal investigation and prosecution.
Civil interest and penalties that could apply to your employment tax liability depending on your particular facts and circumstances:
| Type of Interest or Penalty | Code section that provides authority to assess | Interest or penalty rate |
| Interest | IRC 6205 IRC 6413 | Varies quarterly. 1st quarter 2024 rate is 8-10% |
| Failure-to-pay penalties | IRC 6651(a)(2) IRC 6651(a)(3) | 0.5-25% Or 1/4% or 1% |
| Failure-to-file penalties | IRC 6651(a)(1) | 5-25% |
| Failure-to-deposit penalties | IRC 6656(a) | 2-15% |
| Accuracy-related penalties | IRC 6662(a) IRC 6662(d) | 20% |
| Civil fraud penalties | IRC 6663 | 75% |
| Fraudulent failure-to-file penalties combined with the failure-to-file penalties | IRC 6651(f) | 15-75% |
| Trust fund recovery penalties | IRC 6672 | Equal to total amount of the tax evaded, or not collected, or not accounted for and paid over. |
Criminal charges related to taxes can include, but are not limited to, tax evasion (IRC 7201), filing a false return (IRC 7206(1)), false claims (18 USC 287) and false statements (18 USC 1001). A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000.
Please note that if you willfully filed an employment tax return that fraudulently claimed ERC, or if you assisted or conspired in such conduct, filing for ERC-VDP will not exempt you from potential criminal investigation and prosecution.
The information contained in this article is for informative purposes only and should not be relied on when making any business, legal, or other decisions. This information may be updated without notice and/or may not contain the most current information that is available related to this topic. Please consult with your advisor to determine how this information applies to your specific facts and circumstances.