The Employee Retention Credit (ERC), initially a part of the CARES Act, has been a crucial financial support for businesses during the COVID-19 pandemic. However, this well-intentioned aid has unfortunately become a hotspot for fraudulent activities, leading the IRS to take significant steps to address the issue. In a recent development, the IRS has announced a new Voluntary Disclosure Program to combat the misuse of ERC funds.
Background of the Employee Retention Credit (ERC)
The ERC was designed to incentivize employers to retain employees on their payrolls amidst the economic upheaval caused by the pandemic. The rules for ERC eligibility have undergone several changes, often leading to confusion among business owners. Some companies have exploited this ambiguity, offering to calculate ERC for a large fee and sometimes adopting overly liberal interpretations of the rules or committing outright fraud.
The Problem of Fraudulent ERC Filings
The IRS has been vigilant in monitoring ERC claims, with the Criminal Investigation division actively investigating suspicious activities. An alarming number of businesses, misled by aggressive marketing tactics, have filed for and received ERC funds they weren’t eligible for. This situation has prompted the IRS to add promoter claims involving Employee Retention Credits to its annual "Dirty Dozen" list of tax scams【link】.
The IRS's Response: A New Repayment Program
To address this issue, the IRS has introduced a Voluntary Disclosure Program, allowing employers who received erroneous ERC funds to repay them at a discounted rate. This program, running through March 22, 2024, enables businesses to return these funds at 80% of the original amount received. Remarkably, if the IRS had paid interest on an ERC claim, this interest wouldn't need to be repaid under the program. The initiative reflects the IRS's understanding that many businesses are eager to rectify their mistakes but are concerned about their ability to repay, particularly when a portion of the credit was lost to third-party promoters, or "ERC mills" [link].
Additional Details of the Program
The program is not universally available. It's specifically for employers who are not under criminal investigation or IRS employment tax examination for the relevant tax period and who haven’t received an IRS notice demanding repayment. Businesses will need to fill out Form 15434 and can choose to make installment payments, although penalties and interest would apply.
The Wider Context of ERC Fraud
The Financial Crimes Enforcement Network (FinCEN) has also highlighted ongoing fraud and scams associated with the ERC, resulting in hundreds of investigations and billions in potentially fraudulent claims. FinCEN has issued alerts to financial institutions regarding these fraud schemes, emphasizing the need for vigilance and compliance with reporting requirements.
Conclusion
The IRS’s new Voluntary Disclosure Program is a crucial step in mitigating the fallout from the widespread misuse of the Employee Retention Credit. It offers a balanced approach, allowing businesses to correct their errors while helping the IRS reclaim improperly disbursed funds. This initiative, along with heightened awareness and vigilance, is essential in upholding the integrity of tax relief measures and ensuring that they serve their intended purpose of aiding businesses in need.
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