Everything you need to know about the ERC Voluntary Disclosure Program before the November 2024 deadline.
After identifying 22,000 fraudulent ERC claims (so far), the IRS has offered a rare opportunity for businesses to correct their 2021 Employee Retention Credit errors before they face penalties. Here’s all you need to know to avoid audits, fines, and potential prison time, plus how LedgerWay can help.
While COVID-19 ravaged the health of millions of people, it also ravaged the economy.
Many businesses struggled to stay afloat and were forced to fire or furlough their staff. In response, the government approved the 2020 CARES Act to soften COVID’s impact, support businesses, and protect employees during a period of economic chaos.
As part of the $2.2T CARES Act, the Employee Retention Credit (ERC), or ERTC, was introduced to help businesses keep staff employed, offering a refundable tax credit that could be applied against payroll taxes. Instead of firing employees and further hurting the economy, the ERC would theoretically offer breathing room for business owners, allowing refunds for each W-2 employee paid between March 13, 2020 and December 31, 2021.
As with many tax incentives or credits, the ERC’s eligibility guidelines were complex and confusing, leading businesses to incorrectly claim the credits, often by accident.
The ERC’s requirements changed frequently, from wage eligibility figures to credit amounts, making it rather easy to get it wrong with no fraudulent intentions.
To make it easier to access these credits, some businesses hired “ERC sharks” or third-party payers, organizations that took a percentage of the refund as commission. While some firms that helped businesses claim ERC were legitimate, many were not; they knowingly filed on the behalf of ineligible businesses, scoring hefty commission by doing so.
And, in other cases, business owners filed for ERC despite knowing they were ineligible; many are now being investigated by the IRS and ineligible for non-criminal recourse.
Thus far, the IRS has identified potentially fraudulent claims of more than $1B with some estimating the total amount of ineligible credits or outright fraud could surpass $7B. As a money-motivated organization, the IRS has already initiated more than 380 criminal cases with 12 convictions, yielding 24-month prison stints on average.
According to IRS documents as of June 2024, “between 60% and 70% of the claims show an unacceptable level of risk” or, in non-IRS terms, a shocking number of ERC filings have major red flags. The IRS has already sent out 28,000 disallowance letters, impacting $5B in payments.
However, in a rare showing of grace and understanding, the IRS is offering a potential offramp to those who mistakenly received ineligible tax credits, thanks to the ERC Voluntary Disclosure Program.
With billions of dollars at stake, the IRS is allowing those who incorrectly filed an ERC to self-identify and repay a portion of the funds they received through the Employee Retention Credit Voluntary Disclosure Program (ERC VDP), specifically for the 2021 tax year.
The ERC-VDP is intended to help businesses that received funds to correct errors, mitigate penalties, and encourage transparency, specifically for those who made honest mistakes when filing. It also helps the IRS avoid spending significant resources identifying, auditing, and prosecuting non-compliant businesses.
Get a private, no-cost ERC compliance check.
Our tax experts will analyze your ERC filings, identify errors, and deliver a report so you can take advantage of the ERC-VDP, if necessary. It takes minutes and can save you years of issues. Check your ERC compliance now.
To clarify: the ERC-VDP is not a forgiveness program. It still requires you to repay 85% of the ERC funds, properly file the application package, cooperate with IRS requests for info, and sign a closing agreement.
Furthermore, organizations that “wilfully claimed an ERC that is fraudulent, or if you assisted or conspired in such conduct” are ineligible for the program and could still face an investigation or criminal charges.
But what the ERC-VDP does offer is a clear way for those who made honest errors to avoid significant penalties, fines, and even prison time.
If you suspect or know you made an ERC filing error and received the funds, don’t wait to submit an ERC-VDP application; the deadline to apply is November 22, 2024.
Like most things IRS-related, there are forms to fill out—but it’s a small price to pay to avoid fines and possible criminal charges. Visit the IRS website and follow their step-by-step process.
If you leveraged the help of a third-party payer (e.g. an ERC shark or third-party firm), you must contact them directly to file an application.
To avoid having your application rejected, LedgerWay’s tax and audit professionals will help you navigate ERC-VDP and ensure compliance, saving you significant time and stress. With a deep understanding of IRS regulations, you’ll minimize your risk and avoid further legal complications.
Or, if you’ve received a disallowance letter, our team can also help you with the IRS audit, giving you access to a team of audit and tax professionals who will guide you through every step. Get started by contacting us here.
Like any IRS or tax issue, you should confidently know you’re on the right side of the law—especially with an olive branch like this one on offer.
While many disallowance letters have already gone out, many more will likely follow as the IRS investigates even more claims.
It’s wise to confirm your ERC eligibility before an IRS envelope lands in your mailbox—especially since the IRS has stated 60-70% of ERC filings have major issues.
Unfortunately, knowing whether or not you were eligible for ERC hasn’t become much easier—and the stakes have never been higher. That’s why LedgerWay is offering no-cost ERC reviews, helping small businesses identify ERC compliance issues, take action, and breathe a little easier.
By reviewing your ERC filing and/or disallowance letter, we can help you take the next step towards compliance and peace of mind.
Click here to start your ERC compliance review with LedgerWay.
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