Voluntary Disclosure Options for ERC Fraud Now That VDP Is Closed

Voluntary Disclosure Options for ERC Fraud Now That VDP Is Closed

The ERC Voluntary Disclosure Program closed on November 22, 2024. That deal where you could pay back only 85% of your Employee Retention Credit and walk away clean? Gone. The window has shut. If you received an ERC refund you werent entitled to and you didnt take advantage of that program, your options just got significantly more complicated and significantly more expensive.

This is not a situation where waiting helps you. Every day that passes without addressing a problematic ERC claim is a day closer to the IRS finding it on their own. The agency has made ERC fraud a major enforcement priority. Criminal Investigation has opened over 2,000 cases. People are being indicted. Sentences are being handed down. The question isnt whether the IRS is looking at these claims. The question is whether theyve gotten to yours yet.

If youre reading this, its probably because you know something is wrong with your ERC claim. Maybe you worked with a promoter who made promises that turned out to be false. Maybe you didnt actually qualify but you filed anyway because the money was too good to pass up. Maybe youve been losing sleep for months wondering when the other shoe is going to drop. Whatever your situation, you need to understand what options still exist and what the real costs and risks of each path forward look like.

The 85% Deal You Missed

The IRS ran two ERC Voluntary Disclosure Programs. The first one was open from December 22, 2023 through March 22, 2024. The second one ran from August 15, 2024 through November 22, 2024. Both programs offered the same basic deal. You pay back 85% of the ERC you received, and the IRS forgives the other 15%. No penalties. No interest on the refund amount. No need to amend your income tax returns to reduce wage deductions.

That was a remarkably generous offer from an agency that dosent usually give breaks to people who took money they werent supposed to take. Thousands of businesses used these programs to clean up there ERC problems. If you participated in either program, your situation is resolved. If you didnt, you missed the best opportunity you were ever going to get.

Heres why that matters. Under normal IRS enforcement, you owe 100% of the improper credit plus penalties plus interest. The penalty for claiming a fraudulent credit can be 75% of the credit amount. Interest compounds daily. By the time the IRS catches up to an improper 2021 ERC claim, the total bill could be nearly double what you originally received. The VDP programs let people escape that math. Now those programs are closed.

Some people assumed there would be a third VDP program. There will not be a third program. The IRS has made that clear. The April 15, 2025 deadline marks the end of the ERC program entirely. There is no reason for the IRS to offer another discount program when the underlying credit program itself is ending.

What Options Still Exist

If your ERC claim has not been paid yet, you still have a clean exit available. The ERC Claim Withdrawal Program remains open. You can ask the IRS to treat your claim as if it was never filed. This dosent work if youve already received payment. But if your claim is still pending and you know it was improper, withdraw it. No penalties. No interest. No criminal exposure. Just a return to the status quo before you filed.

If your claim has already been paid, the withdrawal program dosent help you. Your options narrow to two paths:

• First, you can use the IRS Criminal Investigation Voluntary Disclosure Practice. This is a long-standing program that exists independant of ERC. Its designed for people who willfully violated tax law and want to come forward before they get caught.
• Second, you can wait and hope the IRS dosent catch your claim. That second option is not recommended.

The IRS CI Voluntary Disclosure Practice is still available but it is a completly different program from the ERC VDP. The terms are harsher. The requirements are stricter. The risks are higher. Before you consider using it, you need to understand exactly what your walking into.

The Willfulness Admission Problem

The IRS Criminal Investigation Voluntary Disclosure Practice requires you to fill out Form 14457. On that form, you have to make a statement admitting that you willfully failed to comply with tax law. This is not optional. Its a requirement for participation.

Think about what that means. Your signing a document that says you knew you were breaking the law and you did it anyway. Willfulness is the element that separates civil tax problems from criminal tax prosecutions. By filling out this form, your providing the government with direct evidence of the mental state they would need to prove to convict you.

The IRS says that if they accept your disclosure, they wont recommend you for criminal prosecution. Thats true. But heres were it gets dangerous. If the IRS rejects your application or revokes your preliminary acceptance, that willfulness admission stays in your file. The Taxpayer Advocate Service raised this exact concern in there 2024 report. You could submit a voluntary disclosure, have it rejected, and then face criminal prosecution using your own admission as evidence against you.

The IRS updated Form 14457 in June 2024 to make it even stricter. The form now requires you to have all your documents ready to submit immediately upon initial contact from an examiner. It requires six years of delinquent or amended returns. It requires full payment upfront. The bar for participation has gotten higher at exactly the moment when more people need the program.

Timing Is Everything

Voluntary disclosure only works if you come forward before the IRS starts looking at you. This is a hard rule. The IRS defines a timely disclosure as one received before the agency has:

• Commenced a civil examination or criminal investigation
• Received information from a third party alerting them to your noncompliance
• Acquired information directly related to your noncompliance from a criminal enforcement action

The problem is you have no way of knowing when any of these things have happened. If your ERC promoter is under investigation and there cooperating with the government, your name might already be on a list somewhere. If another business that used the same promoter has been audited and provided documents mentioning your name, the IRS might already have that information. If a grand jury has issued subpoenas in your promoters case, the government might already have your email correspondence.

You wont get a letter telling you that voluntary disclosure is no longer available. Youll submit your application and then find out its been rejected because you werent timely. And remember what happens when your rejected. The willfulness admission you made on Form 14457 stays in your file.

This creates a race against time that you might not even know your running. The longer you wait to consider voluntary disclosure, the more likely it is that something has happened in the background that makes you ineligible. Every week that promoters are being investigated is another week where information about there clients is flowing to the government.

Your Promoter Is Probably Cooperating

ERC promoters are facing massive criminal exposure. Many of them filed fraudulent claims for hundreds or thousands of businesses. The aggregated fraud amounts are staggering. When the government starts investigating these promoters, the promoters have every incentive to cooperate.

The math for promoters is brutal. Each fraudulent claim they filed is a separate count. Each count carries years in prison. A promoter who filed 500 fraudulent claims is looking at potential sentences that would effectively be life in prison. The only way out is cooperation. And cooperation means giving up clients.

Cooperation in federal cases means providing information about everyone you did business with. It means handing over client lists, email records, contracts, and marketing materials. It means testifying against the people who paid you to file their claims. Promoters facing decades in prison will give up every name they have to reduce there own sentences.

If you used an ERC promoter who is now under investigation, assume that the government has everything about you. Your name. Your EIN. Your claim amount. The promises that were made to you. The documents you provided. The fee you paid. All of it is probably sitting in a government file somewhere, waiting for a prosecutor to decide what to do with it.

This is why timing is so critical. The voluntary disclosure window isnt something you control. Its controlled by what your promoter is doing and what the government is learning from other investigations. By the time you decide your ready to come forward, it might already be too late.

The Six Year Lookback

The updated Form 14457 requires you to submit delinquent or amended tax returns for the last six years. This is not limited to your ERC claim. This is six years of your entire tax history.

When you enter voluntary disclosure for ERC, your opening up 2019, 2020, 2021, 2022, 2023, and 2024 to IRS scrutiny. Every deduction you took. Every credit you claimed. Every income source you reported or failed to report. The IRS gets to examine all of it.

For some people, this is not a problem. There ERC claim was the only issue and there other tax returns are clean. For other people, this is a significant risk. Small business owners often have aggressive positions on there returns. Errors and inconsistencies that might never have been noticed become visible when the IRS is looking at six years of returns as part of a disclosure investigation.

You need to have a tax professional review your entire six year history before you consider voluntary disclosure. If there are other problems lurking in those returns, you need to know about them before you invite the IRS to look. Coming forward about ERC and then getting caught on unreported income from 2019 is not a winning outcome.

Full Payment Required Upfront

The voluntary disclosure practice requires full payment of taxes, interest, and any applicable penalties before the IRS will accept your disclosure. This is not a payment plan situation. This is full payment. All of it. Now.

If you received a $500,000 ERC refund in 2021 and spent it on business operations, payroll, or personal expenses, you may not have the money to participate in voluntary disclosure. You would need to repay $500,000 plus interest from 2021 to present plus whatever penalties apply. Were talking potentially $600,000 or more depending on the penalty calculation.

Some people simply cannot afford to disclose. They dont have the cash. They cant borrow it. The ERC money is gone and there financial situation has changed since they received it. For these people, voluntary disclosure is theoretically available but practically impossible.

This creates a trap. The people most likely to need voluntary disclosure – those who received large ERC payments they werent entitled to – are also the people least likely to be able to afford it. The ERC money got spent. Now the bill comes due and theres nothing left to pay it with.

If your in this situation, you need to talk to a tax attorney about your options. There may be ways to structure payment arrangements or negotiate with the IRS. But you need professional guidance. Trying to navigate this on your own is how people end up making there situations worse.

The Enforcement Reality

The IRS is not going to forget about ERC fraud. This is a major enforcement priority. The numbers are staggering. IRS Criminal Investigation has opened over 2,039 tax and money laundering cases related to COVID-19 fraud totaling $10 billion in attempted theft. ERC cases are a significant portion of that total.

These are not theoretical investigations. People are being indicted. Promoters are going to prison. Business owners are being charged. The DOJ is prosecuting these cases aggressively. When prosecutors talk about ERC fraud at conferences and in press releases, they make clear that this enforcement wave is just beginning.

The IRS has dedicated entire task forces to ERC enforcement. They have special teams reviewing claims. They have algorithms flagging suspicious patterns. They are cross-referencing promoter client lists with filed claims. The infrastructure for mass enforcement is already built and operating. Its just a matter of how quickly they can work through the volume.

People who assumed that ERC would be too small to enforce or that the IRS would eventually move on to other priorities have miscalculated. The political pressure to prosecute COVID fraud is intense. Headlines about ERC criminals going to prison play well. No prosecutor wants to be seen as soft on pandemic theft. This enforcement push has years left to run.

If you have an improper ERC claim sitting out there, the question isnt whether enforcement will reach you. The question is when. The IRS is working through claims systematically. Promoter investigations lead to client investigations. Document requests lead to audits. Audits lead to fraud referrals. The process takes time but it is happening.

Waiting and hoping dosent change your underlying exposure. It just means you lose the ability to control the timing and terms of how your case is resolved. People who come forward have options. People who wait until the IRS knocks on there door have far fewer options and far worse outcomes.

Making the Decision

Whether to pursue voluntary disclosure is a decision that requires professional guidance. There are too many variables, too many risks, and too many consequences to figure this out on your own.

A tax attorney can evaluate your specific situation. They can:

• Assess whether voluntary disclosure is even available to you based on what might already be happening in the background
• Review your six years of returns to identify other potential problems
• Calculate the actual cost of disclosure including taxes, interest, and penalties
• Help you understand the alternatives

If voluntary disclosure isnt available or isnt affordable, there are other strategies. You might be able to make a reasonable cause argument that reduces penalties. You might be able to negotiate with the IRS once they identify the problem. You might have defenses based on what your promoter told you. But you wont know what options you have until a professional examines your case.

Do not assume that doing nothing is the safe choice. Doing nothing means waiting for the IRS to find you on there own terms, at there own pace, with there own calculations about what you owe and whether criminal prosecution is appropriate. That is not control. That is surrender.

What You Should Do Right Now

If you know your ERC claim was improper, your next step is to contact a tax attorney who handles IRS criminal investigations and voluntary disclosure matters. Not a CPA. Not the accountant who prepared your returns. Not the promoter who filed your ERC claim. An attorney who specializes in exactly this situation.

You need privileged legal advice. Conversations with your attorney are protected. Conversations with your CPA are not. If your facing potential criminal exposure, you need the protection that attorney-client privilege provides. That privilege means the government cannot force your attorney to reveal what you discussed. Without that protection, anything you say to a tax professional could be subpoenaed and used against you.

The attorney will want to understand your situation in detail. How much ERC did you receive. What were the grounds for the claim. Who prepared and filed it. What did you know about the eligibility requirements. What documents exist. Whether you have any reason to beleive an investigation has already started. This information is necessary to evaluate your options.

Every day you wait is a day closer to losing the ability to choose your own path. The IRS is not slowing down. Promoter investigations are producing client lists. The enforcement wave is building. The time to figure out your options is now, while you still have them.

Your future is not set in stone. But the actions you take in the next few weeks could determine whether you resolve this problem on your terms or on the governments terms. The difference between voluntary resolution and government enforcement is the difference between having options and having none. Between paying what you owe and paying what you owe plus penalties plus interest plus legal fees. Between civil resolution and criminal prosecution.

The ERC chapter is closing. April 2025 marks the end of the program. But the enforcement chapter is just opening. The question is which side of that transition you end up on.

Make the call.