ERC Voluntary Disclosure Attorney | Brotman Law

The IRS ERC Enforcement Landscape

The IRS has identified the Employee Retention Credit as the largest fraud risk in the agency’s history. After processing billions in ERC refunds — many filed by aggressive promoters with no legal analysis — the IRS placed a moratorium on new claim processing in September 2023, launched a dedicated Criminal Investigation initiative targeting fraudulent claims, and established the ERC Voluntary Disclosure Program to give employers a path to correct improper filings before enforcement action.

The enforcement numbers are significant. The IRS has identified over 1 million ERC claims flagged for examination, referred hundreds of cases for criminal investigation, and publicly stated that ERC fraud is a top prosecution priority through at least 2026. Employers who received ERC refunds based on improper eligibility determinations — whether through their own error or the advice of a promoter — face potential liability for the full credit amount, plus a 20% accuracy-related penalty, interest from the date of the refund, and in cases involving fraud, a 75% civil fraud penalty or criminal prosecution.

Who Should Consider Voluntary Disclosure

Voluntary disclosure is the right path for employers who have already received an ERC refund and now recognize — or suspect — that the claim was improper. This includes employers who: filed through an ERC mill that used aggressive or fabricated eligibility arguments; claimed credits without a qualifying government order (general economic hardship does not qualify); failed to account for PPP wage overlap; misclassified employer size; or claimed credits on owner-employee wages subject to attribution rules under IRC §267.

The decision to pursue voluntary disclosure is not an admission of wrongdoing — it is a strategic calculation. The VDP offers substantially better terms than waiting for an IRS audit, where the full credit, penalties, and interest are on the table. If you are unsure whether your claim was legitimate, the first step is an independent legal review of your eligibility — not a voluntary disclosure filing.

The IRS ERC Voluntary Disclosure Program (VDP)

How the VDP Works

The ERC Voluntary Disclosure Program allows employers who received ERC refunds to repay 80% of the credit received — keeping 20% to account for amounts already paid to ERC promoters or third-party preparers. In exchange, the IRS agrees to no penalties and no interest on the repaid amount, provided the disclosure is timely and complete. The employer must also provide the names of any advisors or preparers who assisted with the claim.

The VDP is structured as a closing agreement with the IRS. Once executed, the matter is resolved — the IRS cannot later audit the same ERC claim and impose additional penalties. This finality is one of the program’s primary benefits, because it eliminates the uncertainty of waiting for an audit that may come years later with far worse terms.

VDP Eligibility and Terms

To qualify for the VDP, the employer must not already be under criminal investigation for the ERC claim and must not have received notice of an IRS examination of the specific quarters at issue. The employer must repay 80% of the credit in full at the time of application (or request an installment agreement for amounts that cannot be paid immediately). The IRS has reopened the VDP multiple times with varying deadlines, so the availability window should be confirmed with counsel before filing.

The ERC Claim Withdrawal Program

The withdrawal program is distinct from the VDP. It applies to employers who have filed a Form 941-X claiming the ERC but have not yet received the refund. Through the withdrawal program, the employer asks the IRS to treat the claim as if it were never filed — no refund is issued, no penalties accrue, and no interest applies.

Withdrawal is the simplest correction path because there is no money to repay. However, it is only available for claims that are still in processing. If the IRS has already issued the refund, the withdrawal program is no longer an option — the employer must pursue the VDP or file an amended return.

Amended Returns vs. Voluntary Disclosure

An amended return (Form 941-X) can also be used to correct an improper ERC claim by reducing the credit to zero or to the correct amount. However, an amended return does not provide the same protections as the VDP. When you file an amended return, the IRS may still assess accuracy-related penalties (20%) on the overclaimed amount, and interest runs from the date of the original refund. The VDP, by contrast, waives penalties and interest entirely.

The choice between VDP and amended return depends on several factors: the amount of the credit, whether you qualify for VDP, whether the claim was partially legitimate (in which case an amended return reducing — rather than eliminating — the credit may be appropriate), and your overall risk profile.

Criminal Exposure for Fraudulent Claims

The IRS draws a clear line between erroneous claims and fraudulent claims. An erroneous claim — one filed based on a good-faith but incorrect eligibility determination — carries civil penalties. A fraudulent claim — one filed with knowledge that the employer did not qualify, or based on fabricated documentation — carries criminal penalties including prosecution for tax fraud (IRC §7206), false claims (18 U.S.C. §287), and conspiracy (18 U.S.C. §371).

If there is any possibility of criminal exposure, the analysis changes fundamentally. Voluntary disclosure should be evaluated under the broader IRS Criminal Investigation Voluntary Disclosure Practice — not just the ERC-specific VDP — and the employer should retain criminal tax defense counsel before making any disclosure or filing any amended return. Statements made in a VDP application are not protected by privilege and can be used in a subsequent criminal investigation.

Timeline and Process

The VDP process typically takes 60 to 120 days from application to closing agreement. The steps are: (1) independent legal review of the ERC claim to determine whether disclosure is appropriate; (2) preparation of the VDP application with supporting documentation; (3) calculation of the 80% repayment amount; (4) submission to the IRS with payment or installment agreement request; and (5) execution of the closing agreement. Throughout this process, attorney-client privilege protects the communications between employer and counsel — which is critical if the claim involves potential criminal exposure.

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