ERC Audits
ERC audits play a crucial role in ensuring compliance and accountability. Our expert team provides comprehensive support to navigate ERC audits seamlessly, mitigating risks and ensuring a successful outcome.
Executive Summary:
The Employee Retention Credit (ERC) program was created to provide high-value, refundable tax credits—up to $26,000 per employee—to qualified firms who kept workers on staff during the pandemic. Employers need to be aware that the IRS continues to allow them to request this relief by filing updated employment tax forms. Employers should be aware that minimizing audit exposure and risk requires partnering with a qualified advisor who can calculate, record, and defend each aspect required to establish the credit.
Calculating the Employee Retention Credit (ERC) requires careful consideration of the complex IRS advice and careful application to the unique facts and circumstances of each firm. The IRS has made it clear that an eligible business must keep such documents in order to ensure that the employer is able to appropriately prove their ERC eligibility. This analysis inherently requires the compilation and examination of several records.
Employers should be particularly picky when selecting the tax expert to assist them with the ERC claim process given the rising frequency of ERC examinations. Even those employers who have already filed an ERC claim are urged to proceed without waiting for a potential IRS investigation notification. The time has come to make sure.
What is the IRS Looking for?
Again, ERC claim audits have already started, and many people anticipate that the number of audits will rise given that: (1) the IRS recently received additional funding that will be used, in part, to train hundreds of employment tax examiners; and (2) there is a special extension of the time in play (from 3 to 5 years) that permits the IRS to assess ERC claim deficiencies in certain quarters. The latter is particularly indicative that the IRS anticipates requiring more time to assess a significant proportion of these claims.
Critical Factors in ERC Audits: Addressing Eligibility and Compliance Requirements:
IRS audits have thus far focused mostly on eligibility for the credit. And virtually without fail, these examinations draw attention to the requirement that applicants provide a well crafted eligibility note that calculates, substantiates, and defends each element required to support the credit. For instance, if a company’s eligibility claim is based on a partial suspension, the eligibility letter must detail (1) the relevant government order(s) and (2) how those order(s) specifically affected the company. Additionally, if an employer bases its eligibility claim on gross receipts, the eligibility letter must provide the calculations that were done for each quarter that is in question. Any eligibility memo that does not meet this requirement will very certainly result in the IRS finding that the employer was not entitled.
Employers who have filed an ERC claim ought to start going over their files right away. Employers must make sure they have an eligibility document that addresses all pertinent problems specific to their situation. Based on the ongoing IRS examinations, we urge employers to review the following matters as soon as possible with reliable legal counsel:
- Applicable aggregation rules
- Accuracy of the average full-time employee calculation
- Full or partial suspension analysis
- Gross receipts test analysis
- Allocation of wages to more than one COVID relief program (i.e., PPP, RRF) to ensure no double-dipping resulted
Choosing the Right Professional:
Remember that in order to claim the ERC, the taxpayer submitting the information must sign off on it under penalty of perjury, similar to how one would claim a tax deduction on an income tax return. In a new notice, the IRS highlights:
Businesses are advised to exercise caution when responding to direct solicitations and advertising schemes that claim to offer substantial tax savings. Providing accurate information on tax returns is always the responsibility of the taxpayer. Taxpayers who incorrectly claim the ERC may be asked to pay back the credit as well as penalties and interest.
Employers expect to be able to depend on a preparer’s analysis of the ERC claim and trust them to act as competent professionals. The qualified and dependable preparers who certify these returns are aware of the strict standards of behaviour that are expected of them and the consequences for breaking those requirements. The preparer who refuses to sign the IRS Form 941-X required to claim the credit should likely be one of the largest warning signs for an employer in the context of the ERC. If the tax advisor you are consulting with or considering consulting with is unable or unwilling to verify and support every element of the analysis in an ERC claim, consult another advisor.
Need assistance with ERC audits? Our experienced team is here to help. Contact us today for expert guidance and support throughout the audit process. Achieve compliance and peace of mind.