The Internal Revenue Service has announced an extension and reopening of the Employee Retention Credit Voluntary Disclosure Program, providing businesses that received questionable or improper ERC payments with another opportunity to come into compliance. This second iteration of the program reflects the IRS's continued concern about the volume of fraudulent and improper ERC claims filed during and after the pandemic, and its preference for encouraging voluntary correction over pursuing enforcement action against every questionable claim.

Background: The ERC Problem

The Employee Retention Credit was enacted as part of the CARES Act in 2020 and expanded by subsequent legislation. It provided eligible employers with a refundable tax credit of up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for the first three quarters of 2021. At its most generous, the credit could provide up to $26,000 per employee across all eligible quarters.

The size of the credit attracted a cottage industry of promoters who aggressively marketed ERC claims to businesses that may not have been eligible. The IRS has estimated that a significant percentage of the ERC claims filed during the moratorium period are ineligible, either partially or entirely. Many businesses were misled by promoters who failed to properly assess eligibility and who charged contingency fees based on the credit amount, creating a perverse incentive to maximize claims regardless of merit.^[1]

The Second Voluntary Disclosure Program

The second ERC Voluntary Disclosure Program allows businesses that received ERC payments to which they were not entitled to repay 85 percent of the credit received. The remaining 15 percent effectively represents the amount the business may have paid to promoters and other third parties in connection with the claim. The program was open through November 22, 2024, for tax periods in 2021.^[2]

Participation in the program provides several benefits beyond the 15 percent discount. The IRS has indicated that businesses that voluntarily disclose will not be subject to penalties or interest on the repaid amount. Perhaps more importantly, voluntary disclosure significantly reduces the risk of a full ERC examination, which could result in penalties of up to 75 percent for fraud or 20 percent for negligence on the full amount of the improper credit, plus interest.

Who Should Consider the Program

The voluntary disclosure program is designed for businesses that have already received ERC payments and have reason to believe that their claims were improper. This includes businesses that were told by promoters that every business qualified for the ERC, businesses that claimed the credit for quarters in which they did not experience a qualifying decline in gross receipts, and businesses that claimed the credit for wages that were already covered by Paycheck Protection Program loan forgiveness.

Businesses that have not yet received payment on pending ERC claims have a separate option: the ERC Claim Withdrawal Program, which allows them to withdraw their claims entirely before payment is made. This program remains available and does not require repayment of any amount.

The Cost of Inaction

Businesses that received improper ERC payments and do not participate in the voluntary disclosure program face significant risk. The IRS has made ERC enforcement a priority, dedicating substantial resources to examining questionable claims. The consequences of an adverse examination finding include repayment of the full credit amount, plus penalties and interest that can significantly exceed the original credit.

For businesses that relied on promoter advice in filing their claims, the reasonable cause defense under Section 6664(c) may provide some protection against penalties. However, this defense requires demonstrating that the taxpayer relied on competent professional advice after providing complete and accurate information. If the promoter's analysis was cursory or the taxpayer failed to provide all relevant facts, the defense may be unavailable.

Next Steps

Businesses that are uncertain about the validity of their ERC claims should engage qualified tax counsel to review their eligibility. A thorough review should examine the specific eligibility requirements for each quarter claimed, including the applicable gross receipts test or government order test, and should verify that wages used for the ERC were not also used for PPP forgiveness or other credits. For businesses that determine their claims were improper, evaluating the voluntary disclosure option, or the withdrawal option for unpaid claims, is a critical next step before the IRS initiates its own examination.