IRS Announces Second Employee Retention Credit Voluntary Disclosure Program

(Parker Tax Publishing August 2024)

The IRS announced a second employee retention credit (ERC) Voluntary Disclosure Program for employers (participants) to resolve erroneous but non-willful claims for credit or refund involving the ERC. The second ERC Voluntary Disclosure Program, which expires on November 22, 2024, is limited to ERC claims filed for tax periods in 2021 and allows participants to retain 15 percent of the claimed ERC amount. Announcement 2024-30.

Background

The employee retention credit (ERC) is a refundable tax credit intended for businesses and tax-exempt organizations that continued paying employees during the COVID-19 pandemic if their operations were fully or partially suspended due to a government order, they experienced the required decline in gross receipts, or they were a recovery startup business during the relevant eligibility periods in 2020 and 2021.

The IRS has had concerns about scams and potential fraud regarding ERC claims. In Announcement 2024-3, the IRS announced the first ERC Voluntary Disclosure Program, which ended on March 22, 2024. The first ERC Voluntary Disclosure Program included settlement of the ERC for purposes of a participant's employment tax obligations by eliminating their eligibility for the ERC while allowing a participant to retain 20 percent of the claimed ERC amount. Because the ERC reduces the income tax expense for qualified wages under rules similar to Code Sec. 280C, the first ERC Voluntary Disclosure Program also resolved the issue of the corresponding adjustment to income tax expense for participants.

Second ERC Voluntary Disclosure Program

On August 15, the IRS issued Announcement 2024-30 to announce a second ERC Voluntary Disclosure Program. The Announcement specifies eligibility, terms, and procedures for participation in the program.

Like the first program, the second ERC Voluntary Disclosure Program includes the settlement of the ERC for purposes of a participant's employment tax obligations by eliminating their eligibility for the ERC. However, participants in the second ERC Voluntary Disclosure Program are allowed to retain 15 percent (rather than 20 percent) of the claimed ERC amount.

Participation in the second ERC Voluntary Disclosure Program is limited to ERC claims filed for the 2021 tax periods and includes common law employers who used a third-party payer to claim the ERC on their behalf. The second ERC Voluntary Disclosure Program also resolves the issue of the corresponding adjustment to income tax expense for participants. The second program, like the first, is intended to settle erroneous yet non-willful ERC claims. Taxpayers subject to potential criminal liability should use the IRS Criminal Investigation Voluntary Disclosure Practice.

Any participant that has claimed the ERC for tax periods in 2021 and has received a credit or refund prior to August 15, 2024, is eligible to participate in the second ERC Voluntary Disclosure Program, provided that the eligibility requirements set forth in Section 2 of Announcement 2024-30 are met. A participant that claimed the ERC using a third-party payer (such as an agent under Code Sec. 3504, a professional employer organization, or a certified professional employer organization) that claimed the ERC for the participant on an employment tax return filed under the third-party payer's own employer identification number (EIN) rather than the EIN of the participant, may participate in the second ERC Voluntary Disclosure Program, but the third-party payer must submit the application on the participant's behalf.

Under the terms of the second ERC Voluntary Disclosure Program, the participant is not eligible for or entitled to any ERC, including both the refundable and non-refundable portions, for the tax periods at issue. The participant is required to remit back to the Department of the Treasury 85 percent of the claimed ERC. The participant will not be required to repay any overpayment interest received. If the participant makes full payment of 85 percent of the claimed ERC prior to executing the closing agreement, no underpayment interest will apply.

Because the settlement eliminates a participant's eligibility for and/or entitlement to all of the claimed ERC, participants are not required to reduce wage expense with respect to any of the previously claimed ERC. Consequently, if they had not previously reduced wage expense by any of the claimed ERC, participants need not file amended returns or administrative adjustment requests (AARs) to reduce wage expense. Correspondingly, if they had previously reduced wage expense by any of the claimed ERC, participants should not reduce wage expense by any of the claimed ERC if they file an amended return or AAR adjusting the previous reduction to wage expense. A participant will have no income with respect to the resolution of the employment tax obligation by remittance of payment of only 85 percent of the claimed ERC, including both the refundable and non-refundable portions. The IRS will not assert civil penalties related to the underpayment of employment tax attributable to the claimed ERC against a participant that remits full payment of 85 percent of the claimed ERC prior to executing the closing agreement.

In order to participate in the second ERC Voluntary Disclosure Program, an employer must submit a Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, on or before 11:59 pm local time on November 22, 2024. The Form 15434 and any required attachments must be filed electronically via the Document Upload Tool at irs.gov/DUT. Form 15434 will help a participant calculate how much they will be required to pay to the Department of the Treasury under the terms of the second ERC Voluntary Disclosure Program. After receiving the requested information, the IRS prepare a closing agreement under Code Sec. 7121 in accordance with the terms of the settlement. The closing agreement must be signed by the participant and generally must be returned to the IRS within 10 days of the date of mailing by the IRS.

For a discussion of the employee retention credit, see Parker Tax ¶106,460.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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