The IRS announced that it has opened a second VDP through Nov. 22 for employers that received an ERC refund for an employment tax quarter in 2021. The IRS also announced that it plans to mail up to 30,000 new letters to ERC claimants to reverse or recapture potentially more than $1 billion in improper ERC claims. The IRS received more than 2,600 applications from employers that reported more than $1 billion in ERC claims during the first ERC VDP that closed on March 22.
Employers accepted into the second VDP are required to repay 85% of the ERC they received. No interest or penalties will be imposed if the amount owed is repaid in full by the time the employer signs a closing agreement accepting the terms of the second ERC VDP. Additionally, if the IRS paid interest on the ERC refund, an employer accepted into the program will not need to repay that interest.
Crowe observation
The first ERC VDP was more generous and only required repayment of 80% of the credit received. It is unlikely that there will be another ERC VDP. Therefore, eligible employers that did not participate in the first ERC VDP but want to repay the ERC received should apply for the second ERC VDP before the deadline.
While the first ERC VDP was available to employers that claimed an ERC for employment tax quarters in 2020 and 2021, the second ERC VDP is only available for quarters in 2021. Generally, an employer is not eligible to participate in the second ERC VDP if any of the following are true:
- The employer received its ERC refund on or after Aug. 15.
- The employer believes it is entitled to some of the ERC for the quarter.
- The employer is under criminal investigation.
- The employer is under an IRS employment tax examination for the quarter.
- The employer has received an IRS notice that part or all of the ERC is being denied or must be repaid.
- The IRS has received information from a third party that the taxpayer is not in compliance with respect to the ERC for the quarter or the IRS has information related to the employer’s ERC noncompliance from an enforcement action against another taxpayer.
To apply, employers must file Form 15434, “Application for Second Employee Retention Credit Voluntary Disclosure Program,” and submit it through the IRS’ document upload tool by 11:59 p.m. local time on Nov. 22. Once accepted, the employer will have to enter into a closing agreement with the IRS and pay the amount owed in full prior to executing the closing agreement to avoid interest and penalties.
Employers that are not able to fully pay can apply for an installment agreement, which requires submission of detailed financial information to demonstrate the inability to pay and requires payment of interest and penalties. Interest on the unpaid amount continues to accrue during the installment agreement payment period.
If an employer outsourced its payroll obligations and had a third party file on its behalf using the third party’s employer identification number, the third party, not the employer, must file the Form 15434.
Other considerations
Employers claiming the ERC were required to file amended income tax returns for the corresponding tax period to reduce previously taken deductions for wages paid and pay any additional income tax due. Employers that apply for the second ERC VDP that previously filed amended income tax returns for the quarter covered by the application should consider filing a subsequent amended income tax return to reclaim deductions related to wages paid for that quarter. Taxpayers generally have three years from the date their initial income tax return was filed to claim a refund. For 2021 income tax returns, that three-year period could expire as early as March or April of 2025.
Employers that are not eligible to apply for the second ERC VDP might be eligible to withdraw their claim or file an amended employment tax return to reverse the claim. Employers that have yet to receive their ERC refund as well as employers that have received their ERC refund but that have yet to cash the check might be eligible to withdraw their claim.
Looking ahead
The IRS has identified significant fraud involving the ERC and has successfully prosecuted several bad actors that claimed credits they were not entitled to. However, the steps the IRS has taken to address this fraud, including the moratorium on processing ERC claims, has frustrated employers that filed valid claims. The IRS’ effort to distinguish between what it believes are valid or invalid claims has been slow, and some employers receiving notices about their ERC claim have questioned the accuracy of those notices and whether notices disallowing the ERC are correct.
Nevertheless, as the IRS continues to closely scrutinize ERC claims, the second ERC VDP provides employers having second thoughts with another opportunity to reverse their claim without having to pay back the entire amount. However, the time to apply for the second ERC VDP is short. Therefore, employers with questions should consult a qualified tax adviser regarding their eligibility for credits claimed and options to mitigate any risks.
