Employers, including portfolio companies, that filed for and erroneously received the employee retention credits (ERC), must take urgent action prior to March 22, 2024, as the IRS is offering employers a limited opportunity to resolve any civil tax liabilities related to their ERC filing. The IRS has concerns about scams and potential fraud regarding ERC claims derived from misleading public advertisements and scams taking advantage of taxpayers. In December 2023, the IRS announced procedures for a Voluntary Disclosure Program (VDP), allowing employers the opportunity to come forward and voluntarily return ERC funds, reducing the risk associated with erroneous claims. It’s important to understand that participation in the program won’t preclude the IRS from investigating criminal conduct and imposing related interest and penalties when found.
In the M&A market, the validity of ERC claims has become a hot topic, particularly since potential liabilities have delayed deal closings and pending ERC claims have also impacted transactions that have not yet closed.
How does the ERC Voluntary Disclosure Program work?
IRS Announcement 2024-3 contains guidelines for employers to participate in the ERC VPD. Employers choosing to enter the VDP will voluntarily come forward and return the funds received under the ERC. Any employer that meets certain eligibility requirements can participate in the program. However, the program is available only through March 22, 2024, giving employers a limited window to participate.
Benefits of participating in the ERC Voluntary Disclosure Program
Employers can obtain several benefits from participating in the program. Perhaps one of the most attractive benefits of the program is the ability to retain 20% of the credit received. Secondly, employers will avoid potential civil litigation, penalties, and interest associated with ERC funds received. Since the employer is no longer responsible for its ERC claim, repayment of the credit received removes consideration of liabilities in an acquisition to the extent the target company participated in the VDP.
Recent events could increase the amount of time funds are held back in escrow; the VDP could eliminate the need for this requirement. A bipartisan tax package, passed in the House on Jan. 31, 2024, contains a proposal to extend the statute of limitations to assess all ERC claims to six years from the current five-year period. Such a statutory period will run from the latest of three triggering events, with filing of a refund claim often being the latest. Since the tax package was already passed in the House, it appears likely to be enacted and passed by the Senate. If the statute of limitations is extended and employers choose not to participate in the VDP, funds may be left in escrow for upwards of six years. If sellers decide to participate in the VDP, this act could eliminate the need for an escrow or otherwise reduce the time funds are held on transactions that haven’t yet closed.
In acquisitions that haven’t closed, there is still an opportunity for the buyer to negotiate with the seller to apply for the program prior to close. This could potentially reduce the need for an escrow related to ERC or reduce the time amounts are held. Some amounts may still need to be held in escrow since the matter may not be resolved until the closing agreement is finalized.
Further, if business owners are looking to sell, the VDP can present an opportunity to clear up any concerns with the employer’s eligibility and related ERC risk prior to going to market.
How to participate in the Voluntary Disclosure Program
To apply, employers must file Form 15434 no later than March 22, 2024. This form will help employers calculate the amount owed. If the ERC was claimed in 2020, Form SS-10 must also be filed to extend the time to assess employment taxes. Once the IRS receives and evaluates the information, participants will receive a closing agreement that they must sign and return within 10 days of the date of mailing by the IRS. Full payment must be made by the time the employer executes the agreement. Installment payment options are available for employers that cannot pay the full amount, but interest payments will apply.
Other considerations for the Voluntary Disclosure Program
Despite its benefits, applicants will face various challenges and uncertainties when participating in the VDP since the IRS has provided little guidance regarding the program.
The application process requires employers to come forward and disclose to the IRS that an erroneous credit was claimed. Therefore, the application process has some inherent risk associated with the filing since the IRS is not prohibited from investigating criminal conduct. The IRS hasn’t specified how long it will take for an employer to be notified of the IRS’s approval or denial of the application. Therefore, applicants should not only be aware of uncertainties surrounding the approval notification process, but also the timing related to the payment due. Further, it’s unclear what the IRS will do with any employers whose applications are rejected.
The VDP offers several advantages for private equity groups and other businesses by reducing potential liabilities associated with erroneous or uncertain ERC claims related to future and historical transactions. Buyers and sellers should promptly evaluate the benefits, determine whether participation in the program is advisable, and apply to the VDP prior to the deadline of March 22, 2024.
