Due to the tremendous amount of fraud, waste, abuse, and scams associated with the ERC program, the Internal Revenue Service created the first ERC Voluntary Disclosure Program, which ended on March 22, 2024 (the “VDP-1”).
Last week the IRS announced a second VDP, set to end on November 22, 2024 (the “VDP-2”). A comparison of the two VDPs shows their close similarities:
| VDP-1 | VDP-2 | |
| Start | Dec. 21, 2023 | Aug. 15, 2024 |
| End | Mar. 22, 2024 (Approx. 3 Months) |
Nov. 22, 2024 (Approx. 3 Months) |
| Discount | 20% | 15% |
| Tax on Discount | No | Same |
| Years Covered | 2020–2021 | 2021 |
| Wage Deduction | Reversed | Same |
| Overpayment Interest | Taxpayer Keeps | Same |
| Penalties | None as long as no willful, fraudulent, or criminal circumstances | Same |
The eligibility requirements for VDP-2 are essentially the same as its predecessor:
- The taxpayer must have received the ERC refund(s) prior to the announcement of the program (for VDP-2 this is August 15, 2024, for VDP-1 it was December 21, 2023).
- The taxpayer must not be eligible for any of the ERC refunds received.
- The taxpayer must pay back 85% of the ERC refund(s) received.
- If the taxpayer pays the full 85% prior to executing the settlement agreement with the IRS, no underpayment interest will apply. (As noted above, no overpayment interest received needs to be repaid, which can be a very large amount.)
- The taxpayer may need to amend tax returns to reflect the wage deduction associated with the return of the ERC refund(s); the settlement will provide that the taxpayer will have no income with respect to the 15% of the ERC refund(s) retained.
- The taxpayer will provide the name, address, and phone number of the preparer(s) or advisor(s) who assisted with the ERC claim(s).
- The taxpayer must execute a closing agreement.
The IRS has rebooted the Form 15434, so when applying for VDP-2, make sure to reference the August 2024 version of the form (the version date is shown in the upper left corner of the form). This version is very similar to the prior version, but now includes things such as a requirement to file an extension of the statute of limitations (Form 2750) and collection information statement (Form 433-B) if the taxpayer does not pay back the ERC amount prior to the IRS processing the VDP-2 application.
Takeaways
Given the looming end of the ERC (April 15, 2025), VDP-2 is likely to be the last chance for an employer to participate in a disclosure program that offers a discount to the taxpayer.
VDP-2 should also be considered in the context of merger and acquisition transactions between companies, one or more of whom may have obtained ERC refunds. M&A parties may determine that applying for relief under VDP-2 is advisable to avoid future ERC enforcement by the government. At a minimum, parties should address ERC funding in definitive documents in order to require, or prevent parties, from pursuing VDP-2. Applying for VDP-2 could also accomplish fixing the whipsaw effect that was created by the American Rescue Plan Act’s amendment to Internal Revenue Code section 3134, that extends the statute of limitations to five-years for third and fourth quarter 2021 ERC claims, that in some circumstances could result in the taxpayer losing the ERC and losing the wage deduction associated with the ERC, since the statute of limitations on amending the 2021 federal income tax return was not concomitantly extended and would expire prior to the time when the IRS could audit the ERC for that period.
Nixon Peabody has considerable experience with the ERC and IRS civil and criminal investigations, including negotiating settlements with “Promoters.” We are recommending that companies that have filed for the ERC (whether or not ERC refunds have been received) conduct a self-evaluation of their ERC situation and consider VDP-2, scheduled to expire on November 22, 2024.
For more information on the content of this alert, please contact your Nixon Peabody attorney or the authors of this alert.