On December 21, 2023, the Internal Revenue Service (“IRS”) launched the first Employee Retention Credit Voluntary Disclosure Program (“ERC-VDP”) to assist businesses that seek to return the money they received after filing Employee Retention Credit (“ERC”) claims (IR-2023-247). A second ERC-VDP (IR-2024-213) was opened on August 15, 2024, for 2021 tax periods. These questions and answers are intended to assist CPAs with questions related to the ERC-VDP.
Please note this article is not related to the IRS’ ERC withdrawal program. For more on this program, please refer to FS-2023-24.
Question 1 – What should I tell clients about the ERC-VDP?
Clients should be made aware of the ERC-VDP, highlighting that applications for relief under the program
must be received by November 22, 2024. Clients should also be advised of risks related to ERC and be directed to
IRS and
AICPA resources to obtain more information. Consider sending a newsletter or other general client communication addressing the ERC-VDP. Retain a copy of the newsletter, as well as the distribution list.
Consider including the following in the notification to clients:
- The ERC-VDP permits eligible taxpayers who received but were not entitled to employee retention credits to self-identify and repay 85% of previously received ERC benefits without paying interest or penalties.
- The IRS is actively pursuing erroneous ERC claims and has identified 12 indicators of an incorrect ERC claim (IR-2024-198). Consider directing clients to IRS’ Frequently asked questions about the second Employee Retention Credit Voluntary Disclosure Program, specifically General Information Q5 which states “the IRS continues to identify new methods of analyzing ERC claims to identify ineligible taxpayers. If you claimed and received ERC you’re not entitled to, and you don’t participate in ERC-VDP to correct it, you risk detection by the IRS, which could lead to substantial interest and penalties and increase your risk of criminal investigation and prosecution.”
- Applications to participate in the ERC-VDP must be received by 11:59 p.m. local time on November 22, 2024.
- Civil interest and penalties may apply to the employment tax liability if ERC-VDP is not requested and the ERC claim is found to be erroneous, depending upon the specific facts and circumstances. In addition, if you willfully filed an employment tax return that fraudulently claimed ERC, or if you assisted or conspired in such conduct, filing for ERC-VDP will not exempt you from potential criminal investigation and prosecution.
- Although information about the ERC-VDP is being provided by the CPA to the client, it is presented solely for informational purposes and does not establish an engagement, relationship, or duty of care to aid, assist or advise the client about the ERC-VDP.
- The CPA firm is not providing any advice regarding the client’s eligibility for the IRS ERC-VDP, whether the client should or should not apply for ERC-VDP, or the sustainability of the client’s ERC claim.
- Responsibility for compliance with all tax laws, including ERC, belongs to the client, and the client must make all decisions regarding compliance or whether to participate in the ERC-VDP, and
- If the client wishes to engage the CPA for assistance with the ERC-VDP process, the date by which the client must request this service in writing.
Question 2 – Which clients should I notify about the ERC-VDP?
Ideally, the CPA firm should identify and communicate with clients who utilized third parties to calculate the ERC. However, it may not be practical to identify this subset of clients in a timely manner. As a result, it may be more efficient to notify all clients via a general notification.
Question 3 – How should I respond if a client asks about participation in the ERC-VDP?
The CPA should inform the client of the benefits and risks of participation or non-participation in the ERC-VDP, including risks associated with an IRS audit or criminal investigation. Direct the client to available resources for more information on program eligibility, such as the IRS
Frequently asked questions about the second Employee Retention Credit Voluntary Disclosure Program. specifically Eligibility Q1. Similar to other decisions regarding tax positions, request that the client make its own decision based upon the client’s understanding of the program requirements and risks. Be sure to document this process.
If the client requests the CPA’s assistance with the determination of program eligibility, obtain a separate engagement letter for this additional service, limiting the scope of the services solely to the evaluation of eligibility for the purposes of the ERC-VDP, not whether or not the credit claimed is sustainable.
Question 4 – What should I do if a client requests my assistance with their ERC-VDP application?
Before accepting an engagement to assist a client with their ERC-VDP application, the firm should ensure it has sufficient time to understand the voluntary disclosure program and complete the services before the November 22, 2024 deadline. The client should be informed that assisting with the ERC-VDP application does
not include analysis to determine whether some or all of the ERC received is sustainable. The CPA firm may not wish to accept engagements with clients who fail to appreciate this complexity. Finally, the scope of services to be provided by the CPA should be agreed to with the client via an engagement letter or some other form of written communication.
Question 5 – What should be included in an engagement letter or other written communication to assist a client with the ERC-VDP application?
Engagement letters to assist a client with their ERC-VDP should, at a minimum, address the following issues:
- The scope of services should be limited to preparation of Form 15434, Application for Second Employee Retention Credit (ERC) Voluntary Disclosure Program, for specified quarters.
- Indicate that there is no guarantee that the IRS will accept the application and relief will be granted.
- The CPA firm’s responsibility should be limited to preparation of Form 15434 based upon information provided by the client.
- The client should acknowledge the following:
- The client is eligible and wishes to enter ERC-VDP program,
- The client will provide complete and accurate information to the CPA on a timely basis,
- The client will review and approve the draft Form 15434 prior to filing, and
- The client understands that acceptance or denial of the application by the IRS is not appealable and administrative rights following submission of Form 15434 do not apply.
- Include the date by which the client must provide information to the CPA in order for Form 15434 to be timely filed. State that if the information is not received by this due date, the firm will be unable to assist the client.
- Finally, consider including risk mitigation provisions, such as limitation of liability and limitation of damages, in the engagement letter.
Although a separate engagement letter is recommended, due to the limited nature of the services and anticipated tight deadlines, alternative documentation, such as an email, that captures the information above, may be more efficient. See Appendix A for an example communication.
Question 6 – What else should be considered when assisting clients with the ERC-VDP application?
CPAs who electronically sign ERC-VDP forms must sign under penalties of perjury. Form 15434 includes a statement that the signer has “examined this submission, including any accompanying documents, and to the best of my knowledge and belief, all of the facts contained herein are true, correct, and complete.” As a result, consider obtaining a signed representation letter or other written communication from the client confirming that the information provided to the CPA is true, correct and complete. Engagement agreements should notify clients that this representation will be needed before the application is submitted to the IRS.
Before submitting the application to the IRS, have the client review and approve the application in writing.
Question 7 – Are there any additional considerations if my firm originally calculated the ERC claim that the client now wishes to revoke?
If a client now has cold feet and is requesting ERC-VDP for an ERC claim calculated by the CPA firm, contact your professional liability insurance carrier to discuss.
Question 8 – Are there additional resources to help?
Please refer to the following for additional information and resources regarding the ERC:
Appendix A – Sample ERC-VDP Engagement Agreement
Dear [
Client Representative]:
[
Client Name] (“you,” or “your”) have requested that [
CPA Firm] (“firm,” “we,” “us,” or “our”) prepare IRS Form 15434,
Application for Employee Retention Credit Voluntary Disclosure Program (“ERC-VDP”) and submit this form to the Internal Revenue Service on your behalf. Our services are limited to the preparation of Form 15434 for you for the quarterly periods ending [
Identify specific quarters].This form is solely for filing with the IRS for the purpose of applying for ERC-VDP, and may not be distributed to any other party, in whole or in part, or used for any other purpose, without our express written permission. You agree to indemnify and hold us harmless from any and all claims arising from these services by unauthorized third parties regardless of the nature of the claim, excepting claims arising from our gross negligence or intentional wrongful acts.
You acknowledge that by filing for relief under the IRS ERC-VDP, the IRS may accept, deny, or pursue further compliance actions against you, including and up to a criminal investigation, as indicated by IRS pronouncements. You acknowledge and agree that our services in this engagement are intended solely to assist you with requesting relief from the IRS under the ERC-VDP, and these services do not constitute an endorsement, acceptance, or any other statement regarding the accuracy of your original ERC claim(s) and associated filings or your eligibility for ERC-VDP.
We will prepare Form 15434 based on information provided by you. We will not audit or otherwise verify this information. Providing us with inaccurate or incomplete information or representations may result in your application for ERC-VDP being denied. We shall have no liability for any loss suffered by you resulting from inaccurate or incomplete information, or your failure to provide relevant information on a timely basis.
Prior to submitting Form 15434, you must provide us with a representation letter (
optional: and a signed copy of your Form SS-10, Consent to Extend the Time to Assess Employment Taxes) confirming that the information you provided to us is true, correct and complete.
Our engagement does not include any procedures designed to detect errors, fraud, theft, or other wrongdoing, or instances of non-compliance with tax laws. Therefore, our engagement cannot be relied upon to disclose such matters.
If, for any reason, we are unable to complete the engagement, we will not prepare Form 15434.
You acknowledge and agree that you:
- Are eligible and wish to enter the ERC-VDP program;
- Will provide complete and accurate information to us on a timely basis, and represent this before Form 15434 is filed with the IRS;
- Understand that after applying for the ERC-VDP program, you have no right to appeal any adverse decision or administrative rights after the form is submitted;
- Understand the IRS may deny your ERC-VDP application; and
- Will review and approve the draft Form 15434 prior to filing.
Before we can submit form 15434, we must also have your Form SS-10,
Consent to Extend the Time to Assess Employment Taxes, for tax periods ending in 2021.
In order to complete our services before the ERC-VDP filing deadline, you must provide your information to us by [
Date].
If you fail to comply with the enumerated responsibilities, we will be unable to complete our services and you agree to accept responsibility for any consequences of your failure to fulfill your responsibilities.
Our services will conclude upon the filing of Form 15434 or written notification by either party that the engagement is terminated, whichever comes first.
The terms and conditions of our tax compliance engagement letter with you dated [
Date] also apply to this engagement.
Our professional fee for the services will be $XXXX.
* * * * * *
We appreciate the opportunity to be of service to you. Please confirm your acceptance of the terms of this agreement via return email or signature below.
Very truly yours,
[
CPA Firm]
___________________
[
Accountant Name]
[
Accountant Title]
ACCEPTED:
___________________
[
Client Name]
[
Authorized Officer]
[
Title of Officer]
___________________
[
Date]
* * * * *
[1] NOTE: If the taxpayer is seeking to return funds related to tax periods ending in 2021, IRS guidance for the Employee Retention Credit Voluntary Disclosure Program requires the completion and inclusion of Form SS-10,
Consent to Extend the Time to Assess Employment Taxes. For those taxpayers, consider revising the scope of services by adding the following: Per the conditions of the ERC-VDP, a taxpayer’s application must include a signed Form SS-10,
Consent to Extend the Time to Assess Employment Taxes. We will be unable to submit your Form 15434 unless you provide a signed copy of Form SS-10.