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The Internal Revenue Service (IRS) is escalating efforts to clamp down on misuse of the Employee Retention Credit (ERC) program, urging businesses that may have improperly claimed the pandemic-era relief to take advantage of a limited-time Voluntary Disclosure Program (VDP). With a looming deadline of November 22, 2025, the agency offers a rare opportunity for self-correction before initiating broader enforcement actions.
What Is the Employee Retention Credit?
The ERC, enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020, was designed to incentivize employers to keep staff on payroll during the economic disruption of COVID-19. The refundable tax credit initially allowed businesses to claim up to $5,000 per employee in 2020 and up to $28,000 per employee in 2021.
While the program provided a vital financial lifeline for many, it has become a flashpoint for abuse, with a surge in aggressive marketing from third-party firms promising large refunds with minimal documentation. Businesses were often encouraged to file claims that failed to meet IRS eligibility requirements.
Voluntary Disclosure Program: A Last Chance for Compliance
Under the VDP, eligible employers who believe they received the ERC in error can return 80% of the credit received without penalties or interest. In return, the IRS will waive civil enforcement actions and not refer the case for criminal prosecution.
“This is a unique opportunity for businesses to come clean before we begin aggressive enforcement,” said IRS Commissioner Danny Werfel in a recent statement. “We are giving companies a pathway to self-correct and avoid costly consequences.”
Notably, the program is only available until November 22, 2025; all documentation must be submitted by that date. Businesses that used third-party payroll providers or Professional Employer Organizations (PEOs) to file ERC claims now have until December 31, 2025, to participate in an extension granted due to the complexity of such arrangements.
Who Should Act?
Companies large and small that filed ERC claims, especially those that did so with the help of a third party, are urged to conduct an internal review. Businesses must assess whether they met the core ERC requirements, including:
- A significant decline in gross receipts during the pandemic,
- Full or partial suspension of operations due to government orders,
- Or qualifying under recovery startup business provisions.
Failing to meet these requirements while still claiming the credit can be considered tax fraud under U.S. law.
Global Implications for Multinational Employers
While the program applies only to U.S. federal tax claims, its enforcement has broader implications for multinational entities with U.S. operations. Companies headquartered abroad but with eligible American subsidiaries or branches may need to coordinate with U.S. legal counsel to ensure compliance.
“Multinationals should not assume their global tax departments have full visibility over local pandemic-era claims,” said Maria Delgado, a partner at a global tax law firm based in New York. “We are seeing audits not just of tax returns, but intercompany communications related to pandemic relief planning.”
What’s Next?
The IRS has already launched criminal investigations into fraudulent ERC schemes, and it is expected to ramp up audits and collections once the voluntary window closes. Tax practitioners warn that the agency’s approach will shift from leniency to enforcement once the November deadline passes.
Businesses that cannot repay the full amount may still contact the IRS to discuss payment plans, but those arrangements will not offer the same protection from penalties or prosecution.
Final Thoughts
The ERC Voluntary Disclosure Program offers a strategic exit for businesses that acted in good faith but relied on questionable guidance. With mounting scrutiny and increased audit activity, the cost of inaction could be significant.
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