Due to the enormous amount of fraud, waste, abuse and fraud associated with the ERC Program, the Internal Revenue Service (IRS) created the first voluntary disclosure program for the ERC Program, which ended on March 22, 2024 (“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 great similarities:

The participation requirements for VDP-2 are essentially the same as for its predecessor:

• The taxpayer must have received the ERC refund(s) before the program announcement (for VDP-2 this is August 15, 2024, for VDP-1 this is December 21, 2023).
• The taxpayer must not you are entitled to all ERC refunds received.
• The taxpayer must repay 85% of the ERC refund(s) received.
• If the taxpayer pays the full 85% before signing the settlement agreement with the IRS, no underpayment interest will accrue. (As mentioned above, no overpayment interest will have to be repaid, which can be very large.)
• The taxpayer may need to amend its tax returns to reflect the payroll deduction associated with the repayment of the ERC refund(s). The settlement provides that the taxpayer has no income with respect to the 15% withheld from the ERC refund(s).
• The taxpayer provides the name, address and telephone number of the tax advisor(s) who assisted with the ERC claims.
• The taxpayer must conclude a final agreement.

The IRS has reissued Form 15434, so when applying for VDP-2, make sure you are referring to 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 previous version, but now includes things like the requirement to file an Extension of Limitation (Form 2750) and a Collection Information Statement (Form 433-B) if the taxpayer does not repay the ERC amount before the IRS processes the VDP-2 application.

Findings

With the looming end of the ERC (April 15, 2025), VDP-2 is likely the last chance for an employer to participate in a disclosure program that provides a rebate to the taxpayer.

VDP-2 should also be considered in connection with merger and acquisition transactions between companies, one or more of which may have received ERC refunds. M&A parties may decide that seeking relief under VDP-2 is advisable to avoid future government enforcement of the ERC. At a minimum, parties should address ERC funding in definitive documents to obligate or dissuade parties from pursuing VDP-2. Filing for VDP-2 could also resolve the bullwhip effect caused by the American Rescue Plan Act’s amendment to Internal Revenue Code Section 3134, which extends the statute of limitations for ERC claims to five years for the third and fourth quarters of 2021, which under certain circumstances could cause the taxpayer to lose the ERC and lose the payroll deduction associated with the ERC because the statute of limitations for amending the 2021 federal income tax return was not simultaneously extended and would expire before the time the IRS could audit the ERC for that period.

Nixon Peabody has extensive experience with the ERC and IRS civil and criminal investigations, including negotiating settlements with “promoters.” We recommend that companies that have filed an ERC application (whether or not ERC refunds have been received) conduct a self-assessment of their ERC situation and consider VDP-2, which expires on November 22, 2024.

For further information regarding the contents of this alert, please contact your Nixon Peabody attorney or the authors of this alert.