An important window of opportunity has just closed for companies that have applied for and received an IRS employee retention credit (ERC). The Voluntary Disclosure Program (VDP) launched on December 21st last year was suspended on March 22nd, just three months after its inception. It’s unclear at this time whether they will reactivate it.
The VDP was launched in response to reported cases of ERC fraud. Some businesses claimed the tax credit without fully understanding what it was for. Sadly, many of those companies were manipulated by “ERC experts” who charged them a fee. To offset that, the IRS was offering repayment terms of 80¢ on the dollar, provided the business voluntarily disclosed the fraud.
IRS officials recently reported that $225 million in ERC dollars has been paid back in the first three months of the Voluntary Disclosure Program, and they still have 800 submissions to process. The average amount for repaid ERC claims so far is $450,000 per claim. That’s on top of the 22,000 erroneous claims ($572 million) the IRS has already uncovered.
How Does ERC Eligibility Work?
Chances are that you’re in the clear if you haven’t already received notice that your ERC claim is in question, but you might want to reexamine the qualification criteria just in case. You may be eligible for this tax credit if you owned a business and paid at least one employee between March 13th, 2000, and December 31st, 2021. Sole proprietorships are not eligible.
The ERC tax credit was put in place to offset the loss of revenue due to government-ordered shutdowns during the 2020 pandemic. The credit is capped at $5,000 per employee in 2020. Businesses can claim up to $7,000 per quarter for each employee they paid in 2021, provided they can prove a loss of revenue due to forced full or partial business closures.
The original criteria for ERC qualification caused some confusion for small business owners. For example, taking a loss in 2020 or 2021 doesn’t automatically qualify your business for an ERC tax credit. You need to prove the loss was a direct result of a mandated shutdown, not due to the supply chain issues that followed. Check your records to see if that’s what happened.
Why does the IRS need a Voluntary Disclosure Program?
President Biden signed the Inflation Reduction Act into law on August 16th, 2022. It earmarked $80 billion in funding for the IRS. $45 billion is supposed to be used for “enforcement.” With that kind of cash, why do they need a “voluntary” disclosure plan? The answer is simple. They’re giving American business owners the benefit of the doubt.
Scoff at that if you will, but revenue agents know that many small business owners were convinced that filing for an ERC credit was okay, even if they didn’t qualify. Most of the individuals and firms doing that convincing were paid a fee for their advice. Those are the folks the IRS wants. They’re hoping voluntary disclosures will expose them.
By offering 80% payback terms, the IRS is offsetting the fees and commissions charged by these consultants. The discount could also make small business owners more comfortable in coming forward. It’s a sound financial move to take the initiative on this to avoid fees and penalties. Review your ERC filing to uncover any errors you might have made.
Unintentional vs Intentional ERC Filing Errors
There’s a significant difference between making a mistake and intentionally committing an act of fraud. The IRS understands that new programs like ERC often create confusion in the business community. Some folks simply got their numbers wrong. That’s one of the reasons the Voluntary Disclosure Program was created. You can correct your (unintentional) mistakes.
The other catalyst behind the VDP is to uncover individuals or entities who willfully committed or encouraged fraudulent ERC filings. Participants in the VDP will not be charged additional fees or penalties, provided they pay back the money owed during the specified program timeline. They will be asked about third parties who may have convinced them to file a fraudulent claim.
VDP has been suspended for now, but activity at the US Treasury Department suggests that it will be modified and relaunched soon. They’re looking for public comments on “IRS Form 14534,” which is the application for ERC VDP. Government entities typically don’t request feedback unless they plan to modify and relaunch a program. Expect to see that this year.
Penalties for Incorrect or Fraudulent ERC Claims
The IRS charges fees and assesses penalties when you get it wrong. They’re even stricter if they think you did it on purpose. That is the reason why you should voluntarily disclose your errors, whether intentional or unintentional. Failure to do so could result in civil penalties or even criminal prosecution. Those penalties could include:
- Accuracy penalty (Civil Action): The IRS will charge you a 20% penalty if your inaccurate or fraudulent entries are discovered by their agents.
- Imprisonment for Tax Evasion: You can be convicted of tax evasion, serve up to five years in prison, and pay a $250,000 fine for filing a fraudulent ERC claim.
- Imprisonment for False Statements: This is a lesser charge than tax evasion, but it could still result in a prison sentence of up to three years and a $250,000 fine.
The charge and the fine assessed will depend on the amount of the ERC credit you filed for and whether it was intentional fraud or a simple mistake. Cases that involve multiple entities and several thousand dollars in claims could fall under the purview of the US Justice Department, the US Department of the Treasury, and/or the Internal Revenue Service.
Contact Us with Additional ERC or VDP Questions
If the IRS is taking legal action against you, hire an attorney. If you need to review your ERC filing to make sure it doesn’t contain any errors, contact us here at D&M Accounting Services. You can call us at 262-253-9955 or use our Contact Page to schedule an appointment. Our team can help you with this and any other IRS correspondence to ensure you are ready for your next tax filing.
