IRS reopens voluntary disclosure to fix $1B in ERC claims

The Internal Revenue Service announced Thursday it plans to mail up to 30,000 letters to reverse potentially more than $1 billion in incorrect Employee Retention Credit claims.

It is sending the letters to underscore its reopening of a voluntary disclosure program for a limited time until Nov. 22, 2024. This will allow businesses to fix improper ERC claims at a 15% discount without penalties or interest. 

The ERC program began to help businesses during the pandemic but eventually became the target of aggressive, sometimes predatory, marketing. For instance, some promoter groups called the credit by another name to increase claims. More than 2,600 applications that disclosed $1.09 billion-worth of credits were received during the first disclosure program that ended in March.

"The limited reopening of the voluntary disclosure program provides an opportunity for those with improper claims to come in ahead of IRS compliance work and get a discount on repayments," IRS Commissioner Danny Werfel said in a statement. "This is especially important given increasing IRS compliance actions involving bad claims, many of them are the result of aggressive marketing tactics to lure unsuspecting businesses into claiming the complex credit. This provides a final window of opportunity for those misled businesses to make adjustments and avoid future compliance action by the IRS."

"The push by promoters flooded the IRS with questionable ERC claims, which clogged our systems and slowed work," Werfel added. "We recognize well-meaning businesses are caught up in this, and we are taking important steps to help them. This includes reopening the voluntary disclosure program as well as getting more payments out to qualifying businesses."

Andrew Harrer/Bloomberg

The IRS urges businesses that have received ERC payments to recheck eligibility requirements and consider, with the help of a trusted tax professional, the second program to resolve incorrect claims. Accepted applicants will need to repay only 85% of the credits they received.

This second VDP is open for tax periods in 2021. Employers cannot use the second program to disclose and repay ERC money from tax periods in 2020.

Read more details on the second program, eligibility requirements and how to apply here.