The Employee Retention Credit (ERC) certainly helped many businesses during the COVID-19 pandemic, providing relief to help retain employees and recover financial losses. While the ERC helped many, grave mistakes in claiming the credit have become a widespread issue. Many businesses, influenced by aggressive promoters advertising through payroll companies and tax preparers, unintentionally and fraudulently claimed the ERC.

To address these mistakes and offer businesses a chance to rectify their claims without facing severe penalties, the IRS launched the second round of the Employee Retention Credit Voluntary Disclosure Program, running through November 22, 2024. The IRS is staffing up their auditing department around ERC credits, and is trying to give businesses a chance to avoid the headaches of an audit by repaying the credit. And if you aren’t sure if your credit was 100% legit, this is the time to fix it.

What Is the ERC Voluntary Disclosure Program?

This program allows businesses that incorrectly claimed the ERC to come clean, fix their mistake, and repay what they shouldn’t have received. The great part? You only need to pay back 85% of the wrongly claimed amount and avoid the hassles of audits, interest, penalties, and other IRS headaches. This round of the program is focused on 2021 tax periods, offering businesses a break if they acted too hastily or were misinformed when claiming the credit.

The IRS is aiming to simplify things for businesses and save them from going through the full audit process. In fact, they’ve made it clear that most ERC claims will eventually be audited, so if your business made a mistake, this is a way to settle it now, avoid the audit, and move forward.

Common Signs Your Business Might Have Claimed the ERC Incorrectly

So, how do you know if your business might have claimed the ERC in error? The IRS has flagged several recurring issues that you should look out for. Here are the most common ones:

1. Essential Businesses Claiming ERC Without a Shutdown

Some businesses were told they could claim the ERC even though they weren’t forced to fully or partially shut down due to a government order. Just having your employees wear masks or implementing minor safety measures doesn’t count as a shutdown. If your business remained mostly operational, it’s worth reviewing the rules to see if you were actually eligible for the credit.

2. Lack of Documentation

When claiming the ERC, businesses must show solid proof that they were shut down, at least partially, because of a qualifying government order. If your business claimed the ERC without keeping proper records, this could be a problem. Be sure you’ve documented how a government order affected your operations to support your claim.

3. Claiming Wages for Family Members

This one’s a biggie! Some businesses mistakenly included wages paid to family members when calculating their ERC. But according to IRS rules, wages paid to a business owner’s close relatives—like a spouse, kids, siblings, or parents—don’t qualify. If you included these wages, you might have overclaimed the credit.

4. Claiming Wages Also Used for PPP Loan Forgiveness

Did your business receive PPP loan forgiveness? If so, you can’t double-dip by claiming the ERC for wages that were already covered under your PPP forgiveness. If you mistakenly did this, it’s a good idea to fix it through the disclosure program before the IRS audits your claim.

5. Large Employers Claiming ERC for Working Employees

If your business had more than 100 full-time employees in 2020 (or over 500 for 2021), you can only claim the ERC for employees who weren’t working. Some large employers made the mistake of claiming the credit for wages paid to employees who were still providing services. Double-check your claim to see if you fall into this category.

Other Common ERC Claim Errors to Watch Out For

Here are a few more issues the IRS has flagged that businesses should be aware of:

• Claiming ERC for too many quarters: Some promoters told businesses to claim the credit for all available quarters, even when they weren’t eligible for every period.
• Non-qualifying government orders: Not all COVID-related orders qualify for the ERC. Voluntary closures or guidance from non-government organizations don’t meet the requirements.
• Incorrect wage calculations: The rules for calculating qualified wages changed between 2020 and 2021, and some businesses applied the same limits for both years.
• Supply chain disruptions: Just because your supply chain was disrupted doesn’t automatically qualify you for the ERC. There has to be a direct connection to a government order.
• Claiming for an entire quarter: If your business was only shut down for part of a quarter, you can’t claim the ERC for the whole quarter—only the time your business was actually affected.
• Claiming ERC before having employees or an EIN: Some businesses incorrectly claimed the credit for periods when they hadn’t yet started operations or didn’t have any employees.

Why Should You Participate in the ERC Voluntary Disclosure Program?

If your business made an error when claiming the ERC, joining the Voluntary Disclosure Program offers several benefits:

• Avoid Penalties and Audits: Coming forward voluntarily allows you to avoid the risk of an audit and the possibility of having to repay the entire credit, along with added interest and penalties.
• Discounted Repayment: You only have to repay 85% of what you received in error.
• Streamlined Process: The program simplifies the process of correcting ERC claims and lets you resolve compliance issues quickly.

Who Is Eligible for the Program?

To apply for the second ERC Voluntary Disclosure Program, businesses must meet these criteria:

• You didn’t apply to the first Voluntary Disclosure Program for the same tax periods.
• You’re not under IRS investigation or employment tax examination for the tax period in question.
• You haven’t received a notice from the IRS demanding repayment of the ERC.
• You haven’t already amended your return to remove the ERC.
• The IRS hasn’t received third-party info or launched enforcement actions that indicate non-compliance.

How to Apply for the Program

To participate, businesses need to submit Form 15434, available on the IRS website. Once you submit the form, you’ll need to repay 85% of the ERC you incorrectly received, either in one payment or through an installment agreement, depending on your financial situation.

If your business used a third-party payroll provider, that provider must submit the form on your behalf.

What Happens After You Apply?

Once you’ve applied, the IRS will assign someone to review your case and guide you through the next steps. Once approved, you’ll need to repay the 85% using the Electronic Federal Tax Payment System (EFTPS), which you already use for other federal tax payments.

If you can’t repay the full amount right away, you can request an installment plan. Just keep in mind that interest and penalties will still apply, so the IRS suggests looking into a loan if needed to avoid extra costs.

Don’t Wait—Act Before the Deadline

The clock is ticking! The program is only open until November 22, 2024, so if your business might have made a mistake with the ERC, now’s the time to act. Participating in the program can help you avoid serious penalties, audits, and the repayment of the entire credit with interest.