The IRS announced on August 15, 2024, the establishment of a second voluntary disclosure program (VDP) relating to erroneous ERC claims. See Announcement 2024-30. The IRS released the original VDP in December 2023, which expired on March 22, 2024. See Announcement 2024-3. More than 2,600 taxpayers applied to the first VDP, which allowed participants to retain 20% of the claimed ERC amount tax-free, and not to pay interest or penalties.
The second VDP allows taxpayers an opportunity to resolve their civil tax liabilities relating to erroneous ERC claims, but it is less generous than the first VDP. The second VDP allows participants to retain 15% of the claimed ERC amount tax-free, but it is limited to 2021 ERC claims. Like the first VDP, the second VDP is intended to settle erroneous yet non-willful claims. Taxpayers subject to potential criminal liability should use the IRS Criminal Investigation Voluntary Disclosure Practice.
Eligibility
The second VDP is limited to participants who claimed the 2021 ERC and received their ERC funds before August 15, 2024, provided that:
- The participant is not under criminal investigation, and it has not been notified that the IRS intends to commence a criminal investigation;
- The IRS has not received information from a third party alerting the IRS to the participant’s noncompliance, nor has the IRS acquired information directly related to the noncompliance from an enforcement action;
- The participant is not under an employment tax examination by the IRS for any tax period(s) for which the taxpayer is applying for the second VDP;
- The participant has not been notified by the IRS that the ERC they received is being recaptured for any tax period(s) for which the taxpayer is applying for this second VDP; and
- The participant has not previously received notice and demand for repayment of all or part of the claimed ERC.
The second VDP is available to taxpayers that claimed that ERC directly or through a professional employer organization (PEO) or certified professional employer organization (CPEO). If a taxpayer claimed ERC directly, then the taxpayer submits the second VDP application to the IRS; if the PEO or CPEO claimed the ERC on behalf of a taxpayer, then the PEO or CPEO submits the second VDP application to the IRS on behalf of the taxpayer.
Terms
The terms of the second VDP are as follows:
- The participant is not eligible for, or entitled to, the ERC for the calendar quarter(s) at issue.
- The participant will remit 85% of the claimed ERC to the IRS.
- The participant can retain the interest payment it received on the ERC. If the participant makes a full payment of 85% of the claimed ERC prior to executing a closing agreement, then no underpayment interest will apply. If the IRS approves a request for an alternative payment arrangement, such as an installment agreement, then interest may apply from the agreement date.
- The 15% of the ERC that is retained is tax free, and no amended income tax return is required to be filed to disallow wages relating to the 15% retained.
- The participant must disclose the name, address, phone number, and a description of the services provided by any ERC provider that assisted or advised with respect to the ERC claim.
- The IRS will not assert civil penalties related to the claimed ERC that is the subject of the second VDP as long as the participant remits full payment of 85% of the claimed ERC prior to the execution of a closing agreement.
- The participant must sign a closing agreement.
Next Steps
Taxpayers apply to the second VDP by completing Form 15434 and submitting it electronically to the IRS by November 22, 2024. Payments are made online through the electronic federal tax payment system (EFTPS). Importantly, taxpayers are not accepted into the second VDP until they are accepted into the program and the closing agreement sent to them by the IRS is executed.
The IRS also announced in IR-2024-212 that it was going to issue up to 30,000 letters to reverse or recapture improperly paid ERC claims. This is in addition to the 28,000 ERC rejection letters it began mailing last month. The recapture letters are expected to be mailed in the Fall and are expected to “clawback” more than $1 billion in improper ERC claims. Taxpayers should be aware that if they receive a recapture letter, then they will be ineligible to participate in the second VDP.
If you have questions regarding your eligibility for the second VDP, please out to your Withum tax advisor.