IRS Reopens Program Allowing Businesses to Make Amends for Incorrectly Claiming Tax Credits

The Internal Revenue Service building in Washington on Jan. 4, 2024. Madalina Vasiliu/The Epoch Times

The IRS has reopened a program allowing businesses that had falsely claimed a COVID-19 pandemic-era credit to admit to the mistake, return the funds, and avoid action from the agency.

The Employee Retention Credit (ERC) was introduced during the COVID-19 pandemic and offered a refundable tax credit for businesses that kept workers on their payrolls while remaining shut because of government lockdowns and other restrictions.

However, the IRS observed that a large number of companies were filing false ERC claims. In December 2023, the agency announced a Voluntary Disclosure Program (VDP), which allowed companies that had filed false ERC claims to admit their error and in exchange keep 20 percent of the falsely claimed credits. This program ended in March.

On Aug. 15, the IRS announced that it would reopen the VDP through Nov. 22. This time, businesses can keep 15 percent of the falsely claimed credits while avoiding future audits, penalties, and interest.

“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.

“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.”

In the first VDP that ended in March, the IRS received more than 2,600 applications from ERC recipients disclosing $1.09 billion in falsely claimed credits, according to the agency.

The IRS had earlier sent letters to more than 12,000 entities suspected of having filed incorrect ERC claims, which resulted in $572 million in assessments. In its second round, the agency plans to send up to 30,000 new letters to capture potentially more than $1 billion in improper ERC claims.

These new recapture letters are for claims made during tax years 2020 and 2021. The IRS said businesses that receive these letters won’t be eligible for the VDP program for the calendar period covered by the letter.

Werfel said that the new round of letters serves as “another incentive for businesses that believe they received an erroneous Employee Retention Credit payment to come forward and participate in the disclosure program and resolve the matter on more favorable terms.”

Withdrawing False Claims

Last month, the IRS published a list of warning signs to help businesses identify the validity of their ERC claims.

For instance, only eligible businesses that fully or partially suspended operations because of a government order are qualified, according to the agency. As such, ERC claims from unaffected businesses would be considered incorrect.

Entities classified as “large employers” cannot claim the ERC for workers providing services during the COVID-19 pandemic period.

“Businesses with these indicators should talk to a trusted tax professional and consider using a special ERC Withdrawal Program that remains available,” the IRS stated.

The agency is encouraging businesses with pending unpaid ERC claims to take part in the claim withdrawal program in case they made an incorrect filing. The program allows entities to remove a pending ERC claim that is yet to be processed by the IRS.

Businesses can withdraw the claim without any penalty or interest. The program has already led more than 7,300 entities to withdraw $677 million in claims, according to the agency.

Once a withdrawal is sent, “the IRS will send you a letter telling you whether your withdrawal request was accepted or rejected,” the agency stated.

“Your approved request is not effective until you have your acceptance letter from the IRS. If your withdrawal is accepted, you may need to amend your income tax return,” the IRS stated.

The IRS said that its criminal investigation division had initiated 460 criminal cases related to fake ERC claims as of July 1, with the total amount of these claims estimated to be worth almost $7 billion.

So far, there have been federal charges in 37 investigations, with 17 leading to convictions and sentencings.