The Employee Retention Credit (ERC) was introduced as a relief measure during the COVID-19 pandemic to provide support to businesses.
As regulations have changed over time, business owners need to stay informed about the latest developments related to ERC audits in 2024.
“The ERC was initially estimated to provide over $80 billion in tax relief to businesses affected by the COVID-19 pandemic in the United States.” — IRS
The purpose of this article is to help business owners prepare for Employee Retention Tax Credit audits by providing them with the necessary information and insights.
This ERC audit guide covers the different aspects of ERC audits such as their purpose, triggers, and consequences. It also discusses the specific areas that auditors focus on during ERC audits, providing business owners with valuable knowledge to minimize risks and ensure compliance.
Businesses need to have a thorough understanding of ERC audits in 2024 because they can have a substantial impact on their financial status, reputation, and growth potential.
By staying up-to-date on current information and best practices, business owners can take measures to protect their businesses and make informed decisions about ERC.
So without further ado, let’s explore the complexities of ERC audits and provide business owners with the necessary knowledge to confidently navigate this tax credit!
What is the best way to defend yourself against an ERC audit?
To protect your business in an ERC (Employee Retention Credit) audit, prepare a strong impact statement that clearly explains how your business was affected by the COVID-19 shutdowns.
Your impact statement should provide specific evidence of revenue loss, reduced operations, employee layoffs, or any other significant effects caused by the pandemic on your business. Make sure your documentation meets the IRS guidelines and requirements for claiming the credit.
What is an employee retention tax credit audit?
The ERTC is a tax credit aimed at assisting businesses to retain their workers during the pandemic as part of the COVID-19 relief measures.
Eligible businesses can receive a refundable tax credit for a percentage of employee wages paid. It is intended to aid businesses that have faced considerable revenue loss or partial/complete closure due to COVID-19.
During difficult economic times, the ERTC provides financial assistance to businesses and taxpayers and encourages employee retention by offering a credit amount based on a percentage of qualified wages paid to eligible employees. However, there is a maximum credit per employee per year.
Why should you consider conducting an ERC risk assessment?
Businesses should always perform an Employee Retention Credit (ERC) risk assessment to comply with the program’s requirements and reduce risks. By reviewing eligibility criteria, documentation, and calculation methods, businesses can identify any issues in their practices. This helps avoid errors, penalties, and audits by tax authorities.
A risk assessment helps businesses confirm their eligibility for the credit by examining their payroll records, financial documentation, and other relevant information. It also allows them to find ways to increase the credit amount and make the most of tax incentives.
Conducting a thorough ERC risk assessment can also help businesses protect their finances, stay compliant, and get the most out of the program.
Five Reasons to Conduct an ERC Risk Assessment
1) Validate eligibility: Ensuring eligibility criteria and required documents align with ERC requirements can help prevent making false claims and getting hurt by an IRS audit.
2) Minimize penalties and audits: Examining areas where there may be shortcomings or issues in procedures can reduce the chance of receiving penalties or being audited by tax authorities.
3) Optimize credit utilization: Businesses can make the most of the credit amount and utilize tax incentives that are available to them by reviewing payroll records and financial documentation.
4) Safeguard financial interests: Conducting a risk assessment helps businesses safeguard their financial interests and ensure the ERC is used accurately and in compliance with regulations.
5) Stay updated with regulations: By continuously running risk assessments, businesses can stay up-to-date with the changing ERC guidelines. This helps them adjust their practices accordingly and prevent potential issues.
The IRS is conducting audits on ERC claims regularly and intensely. If you have claimed an ERC under the CARES Act in the past, it may be beneficial to seek a second opinion and have a risk assessment done.
Some dishonest third-party tax credit preparers have misled small business owners and encouraged them to claim ERC credits they did not qualify for. This places the owners at risk of being audited by the IRS and facing severe financial consequences for their business. Consequently, the IRS has started auditing numerous ERC claims.
In case of an audit, it is important to be prepared to defend your ERC claim. If a small business owner is advised by a predatory tax preparer to claim an ERC credit they do not qualify for, they may end up owing back taxes which could bring great financial harm to the company.
Getting an ERC risk assessment done by a reliable tax professional or CPA can help you be ready for an audit, protect your ERC claim, and minimize the impact in case of an audit.
Warning Signs of an Aggressive ERC Credit Preparer May Include:
- Promising tax savings that are “too good to be true”
- Assuring clients of their eligibility before conducting thorough reviews of their finances
- Claiming all businesses in a given vertical count as eligible employers
- Claiming to have had special ERC-related training from the IRS
- Taking large upfront fees or contingency fees based on the amount of the ERC refund
- Not providing clear and detailed information about ERC eligibility criteria
ERC Audit – Notice From the IRS
The IRS carefully reviews Employee Retention Credit (ERC) claims to confirm they meet the program’s eligibility criteria. They are committing a lot of resources to detect any invalid or deceitful claims and have stressed the significance of keeping accurate records and documentation. According to the IRS, employers should beware of third-party companies promoting ERC claims that are invalid or fraudulent.
The IRS carefully examines ERC claims by checking employee numbers, pay, and qualifying periods. Businesses must keep thorough records and documentation to support their ERC claims and anticipate the possibility of audits.
How To Prepare For an ERC Audit
Step 1
For the Employee Retention Credit (ERC) audit process to work in your favor, you should carefully follow the instructions provided in the audit notice from the IRS. Submit the required documentation within the given timeframe to show cooperation and provide all necessary information for their review and evaluation.
Being prompt and accurate in your response can make the audit move along much more efficiently.
Step 2
To complete the Employee Retention Credit audit process successfully, it’s crucial to gather the required supporting documents. These documents should prove that your business was either entirely or partly closed due to a government order, such as official announcements or directives.
Furthermore, you’ll also be required to furnish evidence that demonstrates a decrease in gross receipts during the period when you claimed the ERC.
You can use financial records like bank statements, employment tax records, general ledgers, and other accounting documents. Collect and arrange these papers beforehand to have evidence of your business’s financial activities during the relevant period. This will help you support your claim during the audit process.
Step 3
Work with a reliable and knowledgeable ERTC service or tax professional when dealing with an ERC audit.
ERC professionals are well-versed in tax laws and regulations, as well as the nuances of the ERC program. They can offer valuable advice and support throughout the audit, helping you comprehend your duties and rights, preparing the required documents, and advocating on your behalf with the IRS.
Hiring a competent tax professional can help you communicate with the IRS during audits.
They can ensure your responses to inquiries are accurate, in line with regulations, and comprehensive, reducing the complexity and anxiety of the process. Their proficiency may aid in receiving a favorable outcome, lowering the potential for disputes and penalties.
Step 4
Your tax professional will assist you in producing an impact statement that will present your eligibility and computations for your ERC claim.
This detailed document will describe the COVID-19 impact on your business, such as government-imposed shutdowns or restrictions on operations, gross revenue decline, and other pertinent factors.
The impact statement will act as compelling evidence to illustrate the credibility and precision of your ERC claim, offering supplementary backing and proof to the IRS in case of investigation or audit.
This forward-thinking strategy can boost your credibility with the IRS and protect since businesses that receive professional guidance during the ERC claim review process are less likely to come under intense scrutiny or investigation.
ERC Audits: Frequently Asked Questions
What should I expect during an ERC audit?
When the IRS conducts an audit for your Employee Retention Credit claim, they will thoroughly review your records, documentation, and supporting evidence.
This process involves examining your financial statements, payroll records, and other relevant documentation to ensure that you are eligible for the credit and have calculated qualified wages properly.
In case they need more information or clarification, they may request it from you.
In addition, they might interview relevant staff members who manage the credit. Make sure that all required documents are easily accessible and accurate records are maintained for the eligibility criteria and ERC calculations. Collaborating with a competent tax professional who has ERC audit expertise can help you navigate the ERC auditing process.
How do I prepare myself in case of an ERC audit?
If you want to be ready for an audit related to the Employee Retention Credit (ERC), follow these steps.
- Keep detailed and precise records of everything related to your ERC claim. This includes documentation of the qualifying factors such as the impact of government-mandated shutdowns and the decline in gross receipts.
- Make sure your financial statements, payroll records, and supporting documents are accurate and organized in a way that aligns with the eligibility requirements and calculations for the credit.
- We recommend partnering with a skilled tax professional who can assist you in reviewing your claim, identifying any possible issues, and aiding in creating a clear impact statement that explains your eligibility and calculations.
Taking a proactive approach by maintaining accurate documentation and seeking professional guidance will ensure you are well-prepared and confident in the event of an ERC audit.
How do I ensure my business remains compliant to avoid an ERC audit?
To ensure your business remains compliant, you must understand the eligibility criteria and requirements for claiming the ERC. Keep detailed and precise records of your business operations, including any government-mandated shutdowns, gross receipts fluctuations, and employee retention efforts, and any ERC advance payments you may have received. You should also create internal controls and processes to track and document payroll expenses.
It is important to regularly go over your financial statements and tax filings to make sure they accurately show your business’s activities. Additionally, it may be helpful to get advice from a tax expert who can help you understand ERC compliance and make sure your business is doing everything correctly.
Has anyone been audited for ERC?
Businesses have been audited for the Employee Retention Credit (ERC) by the IRS to check the accuracy and eligibility of claimed amounts. The audit can be triggered by different factors, such as high-dollar claims, inconsistencies in documents, or random selection. The purpose of the audit is to make sure that the businesses have met the required criteria and have appropriate supporting documents to support their claims.
How long does the IRS have to audit ERC claims?
The IRS has a specific timeframe to audit Employee Retention Credit (ERC) claims.
Typically, they have three years from the date the original tax return was filed or two years from the date the tax was paid (whichever is later) to assess additional taxes or initiate an audit. The timeframe may be extended if there is a significant understatement of income or fraud.
What is an Information Document Request?
The IRS may send an Information Document Request (IDR) to ask for certain information and documentation related to a claim for the Employee Retention Credit (ERC). This is part of an audit to check if the claimed credits are eligible and accurate. The IDR usually lists the specific items or documents needed, such as financial or employment tax records and supporting documentation for the ERC.
What happens if you’ve improperly claimed the ERC?
Improperly claiming the Employee Retention Credit (ERC) can result in serious consequences. The IRS may perform ERC auditing or examination to investigate inaccuracies in your claim. If the ERC claim is not valid, you will be required to return the credited amount with penalties and interest. To avoid potential problems, it is important to meet eligibility requirements and accurately calculate and document your ERC claim.
