The Employee Retention Credit (ERC) was a valuable lifeline for many businesses during the pandemic's economic turbulence. However, with increased scrutiny and concerns about improper claims, many ineligible recipients may be forced to repay funds they have received, some after being pressured to file a claim by third party companies. To facilitate repayments without the full sting of penalties and interest, the IRS has implemented a Voluntary Disclosure Program (VDP). The VDP offers an opportunity for businesses that:

• Received the ERC and now have doubts about their eligibility. This could be due to misinterpretations of eligibility criteria, changes in business circumstances, or errors in calculations.
• Face potential IRS scrutiny after claiming the credit. If you've received a letter from the IRS questioning your eligibility, utilizing the VDP can mitigate penalties and expedite resolution.
• Were pressured by aggressive ERC promoters into filing questionable claims. The IRS recognizes the deceptive tactics employed by some promoters and offers leniency to businesses caught in their wake.

The most important benefits of the VDP include:

• Penalty and interest reduction: Participants only need to repay 80% of the improperly claimed ERC amount, avoiding potential penalties and interest that could significantly inflate the debt.
• Avoiding audits and potential litigation: Proactive participation prevents lengthy and costly IRS audits and minimizes the risk of legal action.
• Improved compliance and peace of mind: Settling the matter proactively demonstrates good faith and allows businesses to move forward with greater confidence.

To qualify for the VDP, businesses must submit a completed application by March 22, 2024. This includes accurate disclosure of the improper claim, calculations of repayment amount, and any mitigating factors supporting the reduced repayment. The repayment amount is 80% of the total improperly claimed ERC. However, if significant fees were paid to questionable ERC promoters, additional calculations may be necessary to offset those fees within the 80% limit. Businesses have the option to pay the full 80% upfront or arrange an installment payment plan under certain conditions.

Should You Take Advantage of the VDP?

First, you should work with your accountant to thoroughly assess your situation to determine if the VDP is the best course of action. Consider the amount of ERC received, potential penalties and interest, and likelihood of IRS scrutiny. Gather all relevant documentation, including tax returns, financial statements, and communications with ERC promoters, to support the VDP application. Precisely calculate the 80% repayment amount and any potential offsets for promoter fees so you can make an informed decision about the VDP.

The IRS's VDP offers a valuable opportunity for businesses to rectify improperly claimed ERC funds while minimizing potential consequences. But the process is complex and hampered by a looming deadline. If you feel you may have received ERC funds improperly, please contact Gray, Gray & Gray today at 781.407.0300 to discuss your situation.