On January 12, 2024, the IRS announced a second Employee Retention Credit Voluntary Disclosure Program (ERC-VDP), offering businesses that received ERC payments they were not entitled to a path to repay at a reduced rate. Under the program, eligible employers can repay 80% of the ERC they received — retaining 20% to account for the fees many paid to ERC promoters — while avoiding penalties and reduced exposure to interest. The program runs through March 22, 2024.^[1]

The renewed program comes as the IRS continues to process a massive backlog of ERC claims and ramp up enforcement against what it has described as widespread fraud and abuse in the ERC space. For businesses that received credits based on aggressive or incorrect advice, the VDP represents the best available off-ramp.

Background: The ERC Problem

The Employee Retention Credit was created by the CARES Act in 2020 and expanded by subsequent legislation to provide a refundable payroll tax credit to employers that experienced significant revenue declines or were subject to government shutdown orders during the COVID-19 pandemic. For 2020, the credit was worth up to $5,000 per employee. For 2021, it was worth up to $7,000 per employee per quarter — up to $28,000 per employee for the full year.^[2]

The credit's generous terms, combined with the ability to claim it retroactively by amending previously filed employment tax returns, created an enormous market for ERC promotion. Third-party promoters — many with no tax expertise — marketed the credit aggressively to businesses that may not have qualified, using misleading claims about eligibility and charging contingency fees of 15-30% of the credit amount. The IRS has estimated that a significant percentage of pending ERC claims are either incorrect or fraudulent.

In September 2023, the IRS imposed a moratorium on processing new ERC claims and began developing additional compliance filters. The first voluntary disclosure program opened in late 2023 with limited success. The expanded 2024 program offers improved terms designed to encourage broader participation.

Program Terms

Under the second ERC-VDP, employers can repay 80% of the ERC they received (net of any amount already repaid). The 20% reduction is intended to account for the promoter fees that many employers paid and cannot recover. The IRS will not require repayment of interest that was included in the ERC refund check, and the IRS will not assess penalties against VDP participants for the erroneous claims.^[3]

To participate, the employer must not be under criminal investigation or under examination by the IRS for the ERC specifically. The employer must repay the 80% amount in full — installment agreements are not available under the VDP. This full-payment requirement may be challenging for businesses that spent the ERC proceeds and cannot readily generate the repayment amount, but the alternative — full repayment plus penalties and interest following an audit — is substantially worse.

The application is made by submitting Form 15434 (Application for Employee Retention Credit Voluntary Disclosure Program) through the IRS Document Upload Tool. The employer must identify which quarters' credits are being disclosed and provide the amount received.

Who Should Consider the VDP

The VDP is most relevant for employers who received ERC payments based on advice from third-party promoters and who, upon reflection or upon consultation with a qualified tax advisor, have concerns about whether they actually qualified. Red flags that suggest the claim may not withstand scrutiny include claims based on supply chain disruptions without adequate documentation, claims where the employer cannot identify the specific government order that caused a full or partial suspension, and claims where the revenue decline calculation used an inappropriate comparison period or excluded relevant revenue.^[4]

Employers who are confident in their eligibility — because they experienced well-documented revenue declines exceeding the statutory thresholds or were subject to clearly applicable government orders — should not feel pressured to participate in the VDP. The program is a remedial tool for incorrect claims, not an admission that all ERC claims are suspect.

Consequences of Not Participating

Employers who received ERC payments they were not entitled to and do not participate in the VDP face a less favorable outcome when the IRS eventually audits their claims. An employer found to have received an incorrect ERC will be required to repay 100% of the credit plus interest from the date of the erroneous refund. In addition, accuracy-related penalties under IRC § 6662 (20% of the underpayment) or civil fraud penalties under IRC § 6663 (75% of the underpayment) may apply. For promoters and employers who engaged in willful fraud, criminal prosecution is possible.^[5]

The IRS has stated that it is using data analytics, artificial intelligence, and third-party information to identify questionable ERC claims. The processing moratorium gives the IRS time to build its case selection models before resuming claim processing. Employers who know or suspect their claims are incorrect should treat the VDP as a time-limited opportunity to resolve the issue on the most favorable terms available.

The March 22, 2024 deadline is firm. Employers considering the VDP should consult with a qualified tax controversy advisor promptly to evaluate their eligibility, assess the strength of their original claims, and determine whether participation is the right course of action.