Following its September 2023 moratorium on processing new Employee Retention Credit claims, the IRS has announced the framework for a voluntary disclosure program designed to give employers who received improper ERC payments a path to resolution. The program allows eligible employers to repay 80 percent of the ERC they received—keeping 20 percent to account for fees paid to promoters and other costs—in exchange for resolution of their ERC liability without penalties or interest on the repaid amount.^[1] For employers who filed ERC claims at a promoter's urging and now have doubts about their eligibility, this program represents an important—and time-limited—opportunity.

Background: Why a Voluntary Disclosure Program

The ERC voluntary disclosure program is the IRS's response to the massive wave of improper claims that prompted the processing moratorium. As we discussed in our prior post on the ERC moratorium, the IRS estimated that a significant percentage of pending ERC claims were ineligible, driven by aggressive promoters who marketed the credit to businesses that did not meet the statutory requirements. Many of these businesses filed claims in good faith, relying on the promoter's representations, and have already received refund checks from the IRS.

The voluntary disclosure program recognizes a practical reality: many employers who received improper ERC payments were victims of promoter misconduct rather than willing participants in tax fraud. By offering favorable terms—reduced repayment and no penalties—the IRS is providing an incentive for these employers to come forward voluntarily, rather than waiting for the IRS to identify them through audit. The program also recognizes that many employers paid substantial fees (often 25 to 30 percent of the credit) to the promoters who filed the claims, and requiring full repayment of the credit would effectively penalize the employer for money that went to the promoter.^[2]

Key Terms of the Program

The voluntary disclosure program has several important features. First, eligible employers must repay 80 percent of the ERC received. The 20 percent reduction is intended to account for amounts paid to promoters and other third parties. Second, employers who participate in the program will not be assessed penalties or interest on the repaid amount. Third, the IRS will not pursue criminal referral for employers who make a voluntary disclosure in good faith. Fourth, employers must cooperate with the IRS in providing information about the promoters and preparers who facilitated their claims—a provision designed to support the IRS's broader enforcement efforts against the promoter ecosystem.

The program is available to employers who received ERC payments for tax periods in 2020 or 2021 and who are not currently under audit, criminal investigation, or examination with respect to their ERC claims. Employers who are already under audit or investigation are not eligible for the voluntary disclosure program but may have other options for resolving their liability, including the standard audit process and the traditional voluntary disclosure practice.^[3]

Who Should Consider the Program

The voluntary disclosure program is most relevant for employers in several categories. The first is employers who were solicited by ERC promoters and filed claims without independent verification of their eligibility. These employers may have received the credit based on the promoter's analysis—which may have been aggressive, misleading, or simply wrong—and now have questions about whether they actually qualified.

The second category is employers who qualified for the ERC for some quarters but not others. Some promoters filed claims for every available quarter without carefully analyzing whether the eligibility requirements were met for each specific period. An employer who was legitimately eligible for the credit in Q2 2020 (when operations were suspended by government order) but not in Q3 2021 (when gross receipts had recovered) may need to address the ineligible quarters while preserving the valid claims.

The third category is employers who have already been contacted by the IRS with questions about their claims but who are not yet formally under audit. Early engagement with the voluntary disclosure program—before the audit formally begins—may preserve eligibility and provide more favorable terms than would be available through the audit process.

The Cost of Not Participating

Employers who received improper ERC payments and do not participate in the voluntary disclosure program face a less favorable resolution if the IRS later identifies their claims as ineligible. In a standard audit, the employer must repay 100 percent of the improperly claimed credit, plus interest from the date the refund was received, plus potential penalties. The accuracy-related penalty under IRC § 6662 is 20 percent of the underpayment. If the IRS determines that the claim was filed with intent to defraud, the civil fraud penalty under IRC § 6663 is 75 percent.^[4]

The difference between the voluntary disclosure terms and the audit outcome is substantial. An employer who received a $200,000 ERC refund and participates in the voluntary disclosure program would repay $160,000 with no penalties or interest. The same employer, if caught in an audit, could owe $200,000 plus approximately $20,000 in interest (depending on the period) plus $40,000 to $150,000 in penalties—a total exposure of $260,000 to $370,000. The voluntary disclosure program is, by any measure, the better deal for employers who know or suspect that their claims are ineligible.

Next Steps for Employers

Employers who are considering the voluntary disclosure program should take several immediate steps. First, engage independent tax counsel—not the promoter who filed the original claim—to conduct an objective assessment of whether the ERC claims are supportable. Second, gather and organize all documentation related to the ERC claims, including the promoter's analysis, the Forms 941-X that were filed, records of government orders that affected operations, and gross receipts data for the relevant periods. Third, if the assessment indicates that some or all of the claims are ineligible, work with counsel to prepare and submit the voluntary disclosure application before the program's deadline.

The voluntary disclosure program is a limited-time opportunity. Employers who delay may find that the program has closed or that they have been selected for audit before they can participate. The window for voluntary action is always narrower than it appears, and the advantages of coming forward voluntarily diminish as the IRS's enforcement efforts intensify.^[5]