Should You Accept the IRS’ ERC Settlement Offer?

February 2024 ISSUE By Wesley W. Lyon, II January 3, 2024 Updated February 1, 2024
Tax Practice/Corporation
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More than 50% of practices have claimed the Employee Retention Tax Credit (ERC) with some claims exceeding $200,000. Now, the IRS scrutiny of those claims is dramatically increasing. In September, the IRS announced a moratorium on processing all new ERC claims, which remains in effect. At that time, the IRS had received 3.66 million ERC claims with more than 600,000 waiting to be processed and had paid out more than $230 billion in claims.

In October 2023, the IRS announced a withdrawal program for previously filed suspect ERC claims that hadn’t yet been paid, or if paid, not yet deposited. We discussed the steps to take to limit your damages in our November 2023 article, “Did You File a Suspect ERC Claim? Follow These IRS Guidelines to Limit Your Damages.” Since the IRS rolled out this program, it has received more than $100 million in ERC voluntary withdrawals.

In December 2023, the IRS advised more than 20,000 taxpayers that their ERC claims were being disallowed because either they had no business in existence or didn’t have employees during the period of eligibility, and requested the return of the ERC funds.

Uncertain as to whether you qualify for the ERC during 2020 or 2021? Refer to our September 2023 article, “How to Navigate the Controversial Employee Retention Tax Credit” for more information. Also, be sure to watch our webinar, “Getting to the Truth of the Employee Retention Tax Credit,” to ensure you receive all tax credits that you DO qualify for, without exposing yourself to unnecessary financial risks. And, learn how to handle any improper ERC claims made on your behalf to reduce your risk of costly and time-consuming audits, as well as IRS penalties and interest, using the newly offered IRS settlement program described below.

IRS Settlement Offer

The IRS’ October withdrawal program focused on ERC claims that hadn’t been paid, or if paid, hadn’t yet been deposited. Shortly before Christmas, the IRS rolled out a generous settlement offer, known as the Voluntary Disclosure Program (VDP) that focuses on ERC claims that have already been paid and deposited.

If you decide to settle, you must apply for the Program; if your VDP application is approved, the IRS will send you a Closing Agreement to settle all matters. You must pay back 80% of the credit received at the time you sign the Closing Agreement for the IRS to waive all penalties and interest. If
you don’t have the funds available to repay the entire 80% of the credit received and can’t borrow them, you may be approved by the IRS for a payment plan, but penalties and interest will still apply.

The IRS recognizes that many promoters charged hefty contingency fees (15-25% of the claim). So, the IRS thought it fair to require you to only repay the estimated net amount received (80%).

Moreover, if your VDP claim is approved, you won’t have to repay any interest received along with your ERC payments, nor will you be charged interest or penalties on the ERC amounts received. Finally, this will allow you to claim an income tax deduction for the full amount of wages previously paid, unreduced by the amount of ERC previously received.

But, you must act quickly to take advantage of this generous settlement offer! Applications must be received by March 22, 2024, in order to qualify. Otherwise, you’re out of luck!

Meanwhile, the IRS is taking aggressive action, seeking civil and criminal penalties on promoters who pushed taxpayers into making erroneous ERC claims. As a result, your practice must provide the name(s), address(es), and phone number(s) of any advisors or tax preparers that assisted you in filing your ERC claim, as well as details about the services they provided, as part of the VDP settlement deal.

This may put some doctors in a tricky position if your CPA filed your ERC claim. Even though CPAs are generally prohibited from accepting contingent fees when preparing amended tax returns, some did. If your CPA did, accepting the IRS’s settlement offer may require you to find a new tax preparer.

Do You Qualify?

You must meet all the following tests in order to qualify for the VDP:

  1. Your ERC claim has been processed and you’ve received and deposited the funds, but no longer believe you’re eligible.
  2. You’re not under criminal investigation by the IRS.
  3. You’re not under an employment tax audit for the quarter in question, nor has any third party provided information to the IRS indicating that you’re not eligible; and
  4. You haven’t received any IRS notice or demand for repayment of all or part of the ERC funds previously received.

How To Apply for the VDP

To apply for this program, you must file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program (available at IRS.gov), using the IRS document upload tool. If you outsource your payroll through a third party, the third party, not your practice, must file Form 15434.

If you handle your payroll filings, we recommend that you contact your CPA to ensure that the application is completed properly. If you feel that your practice is eligible for one or more quarters, but not for others, you can apply for the VDP for all calendar quarters that don’t qualify, while keeping the credit for the periods you feel you do qualify for.

Furthermore, if you’re applying for forgiveness for any 2020 calendar quarter, you must also file Form SS-10, Consent to Extend the Time to Assess Employment Taxes. Finally, it’s a good idea to grant your CPA your power of attorney (Form 2848) for this tax matter, allowing them to communicate and deal with the IRS on your behalf.

Our Advice

If you believe your practice qualifies for one or more quarters because it meets the decline in collections test, or your practice was fully or partially suspended due to a government order which had more than a nominal (10%) impact on your practice revenue, no action is required since you should prevail in the event of an IRS audit.

If that’s not the case, we recommend taking advantage of this generous settlement offer from the IRS. If approved, this’ll allow you to avoid a stressful, costly, and time-consuming IRS audit, penalties of 25% or greater, interest, while keeping 20% of the credit to the extent that it wasn’t paid to a third-party promoter or your CPA.

Playing the audit lottery by burying your head in the sand could prove extremely costly if your ERC claim is disallowed. While unlikely, the IRS could potentially prosecute you for tax evasion or filing a false tax return, carrying a maximum prison sentence of 3-5 years, plus fines of up to $250,000.

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