The Internal Revenue Service (IRS) has launched a "voluntary disclosure program" for businesses that improperly claimed a pandemic-era tax credit and want to return the money.

According to CNBC, the Employee Retention Credit (ERC), which is worth thousands per employee, supports small businesses affected by the COVID-19 pandemic.

However, given how easy it has become to file for the credit, the ERC became susceptible to abuse, prompting the IRS to implement measures to rectify misleading claims.

Encouraged by third parties promoting improper ERC claims, this lucrative tax break reportedly led to a surge in companies claiming the credit in error.

In response, the IRS launched a "special withdrawal process" in September for businesses that may have wrongly claimed this tax credit. This withdrawal option allows small businesses pressured or misled by ERC promoters to file ineligible claims.

Claims that are withdrawn will be treated as if they were never filed. The IRS will not impose penalties or interest. Last October, the IRS warned business owners to be on the lookout for these ERC marketers.

(Photo : Steve Buissinne from Pixabay)

New Voluntary Disclosure Program of IRS

The newly launched voluntary disclosure program allows the applicants to repay the credits they received at a 20% discount to cover third-party promoter fees.

In a statement, the IRS said this program, which has been in development for several months, is part of the IRS' larger effort to stop aggressive ERC promoters from misleading some employers into filing claims. 

The deadline to apply to the voluntary disclosure program is March 22, 2024, and the IRS added provisions allowing repayment of 80% of the claim received.

Those unable to meet the 80% repayment may be considered for an installment agreement on a case-by-case basis, but with interest and penalties.

The IRS also encourages employers with pending ERC claims to consider a separate withdrawal program that will allow them to remove a pending ERC claim with no interest or penalty. 

The agency has already received over $100 million in withdrawals as it intensifies audits and criminal probes related to these claims.

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IRS Sends 20,000 Letters

As part of its crackdown on "dubious" filings, the IRS has started sending up to 20,000 letters with proposed tax adjustments that will recapture the erroneously claimed ERC.

The agency noted that these letters, which are on top of the 20,000 rejection letters announced earlier this month, are currently for tax year 2020, and the work continues for tax year 2021, with additional mailings planned. 

If the agency identifies an employer that has received excessive or erroneous ERC, the IRS will reclaim that claim through normal tax assessment and collection procedures.

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