IRS Launches ERC Audit Program

You’re navigating the tricky waters of the Employee Retention Credit (ERC aka ERTC), and now the IRS launches ERC Audit Program. It’s critical you’re prepared, whether confident or uncertain about your claim.

This article will arm you with the knowledge to survive an audit, highlighting reasons, implications, and defense strategies. You’ll also uncover the role of ‘ERC mills’ and potential red flags.

Understanding is your first defense, so let’s dive into the complexities of an IRS audit.

Why is the IRS conducting ERC audits?

You’re likely aware that a significant number of businesses have claimed tax credits through the Employee Retention Credit (ERC) program they weren’t eligible for, prompting the IRS to launch an extensive audit program. This action was taken in response to a widespread dissemination of misinformation about the ERC, especially after it became available to businesses that had already taken out Paycheck Protection Program (PPP) loans.

In particular, a surge of unqualified agents working for so-called ‘ERC mills’ exploited this situation, falsely assuring small business owners of their eligibility for ERC tax savings. These mills are notorious for making sweeping generalities about eligibility criteria and enticing clients to claim hefty tax savings under the ERC program, all while charging substantial contingency fees.

To qualify for the ERC, businesses must meet specific criteria relating to how they were financially impacted by the COVID-19 pandemic and official responses to it. However, ERC mills bypassed these nuances, leading many businesses to claim credits they weren’t entitled to.

The IRS is now poised to review most ERC claims in the coming years. This broad-spectrum audit aims to rectify the situation by identifying fraudulent claims and ensuring that the ERC benefits those truly eligible.

If you’re worried that you’ve been taken advantage of by an ERC mill, it’s crucial to get a second opinion from a trusted tax professional. This step involves a thorough review of your initial claim and supporting documents, allowing you to evaluate your audit risk and prepare accordingly. Remember, understanding your situation is the first step towards a solid defense.

Note – There is now also a withdrawal process if you feel you need to withdraw your ERC claim.

WILL THE IRS AUDIT ERC TAX CREDITS?

Given the rampant abuse of the ERC program by ineligible businesses, it’s highly likely that the IRS will indeed audit ERC tax credits. This doesn’t mean every ERC claim will be audited, but a significant increase in audits is foreseeable.

The primary reasons for this are twofold. First, the IRS is determined to weed out fraudulent claims and prevent abuse of the program. Second, the agency is keen to ensure the accuracy of ERC claims, given the complexity of the criteria and the high probability of unintentional errors.

If you’ve claimed the ERC, prepare for possible audit scenarios. The IRS will likely verify your eligibility, checking if your business was fully or partially shut down by government order or experienced a significant decline in gross receipts. They’ll also scrutinize the accuracy of the number of employees and wage amounts claimed.

Furthermore, the IRS may look for other errors like claiming relatives as qualified employees or receiving credits for wages paid using PPP funds. You may be required to provide additional documentation to substantiate your claim. Though the specifics of this documentation aren’t yet known, it’s sensible to keep comprehensive records in anticipation.

An audit doesn’t automatically signify wrongdoing. If you’ve claimed the ERC legitimately and can prove your eligibility, there’s no cause for alarm. However, if you’re unsure or made an error in your claim, it’s advisable to seek professional help. A seasoned tax professional can guide you through the audit process, minimizing potential penalties and stress.

WHAT DO I DO IF MY ERC REFUND IS AUDITED BY THE IRS?

If your Employee Retention Credit (ERC) refund is audited by the IRS, it’s essential to act promptly and strategically. Your initial step should be to seek professional assistance to ensure that you’re navigating the process correctly.

Keep track of all communications and notices from the IRS, submit all required documentation on time, and be prepared for potential audit fees if your initial filings were incorrect.

REACH OUT TO A PROFESSIONAL FOR HELP FIRST

In the event of an IRS audit on your ERC refund, your first step should be reaching out to a professional tax advisor for guidance and assistance. A seasoned expert can help you navigate the complexities of an audit and provide strategic advice on how to respond.

• Why reach out to a professional?
• They understand the ins and outs of tax laws and can decode IRS jargon.
• They can help prepare your response, ensuring it’s accurate and complete.
• They can advise on potential outcomes and strategies to minimize any negative impact.

• What can a tax professional do for you?
• They’ll review your original ERC claim and assess the validity of the audit.
• They’ll help compile necessary documents and craft a strong defense.
• They’ll represent you during IRS discussions, advocating for your best interests.

STAY ON TOP OF COMMUNICATIONS & NOTICES

Even though receiving an audit notice for your ERC refund from the IRS might feel overwhelming, it’s crucial that you stay on top of all communications and notices. Ignoring them won’t make the problem disappear. Instead, meet it head-on.

Ensure you send all required documents by the set deadlines. If you’re navigating this process alone, don’t hesitate to contact the IRS for clarification. If a professional is handling the audit on your behalf, consult them about all IRS correspondence. Remember, if they’re acting as your Power of Attorney, they’ll handle all IRS communications, alleviating a lot of stress.

Staying abreast of all communications and notices ensures you’re well-informed and prepared to tackle any issues that arise during the audit process.

SUBMIT ALL NECESSARY DOCUMENTATION

When your ERC refund is audited by the IRS, it’s crucial that you promptly submit all necessary documentation to back up your claims. These documents serve as concrete evidence to validate your tax return, and any delay or negligence can invite unwanted trouble.

Your documentation should include:

• Evidence showing your business was impacted by government mandates. This could be orders for full or partial shutdown.
• Show a decline in gross receipts during the period you claimed ERC.
• Payroll records and employment tax records. These should be detailed and cover the entire period you claimed ERC.

BE PREPARED FOR AUDIT FEES FOR INCORRECT FILINGS

If you’ve submitted all the necessary documentation and are still facing an audit, it’s crucial to understand the potential fees associated with incorrect filings. The most common penalty is a 20% accuracy-related fee applied to the excessive amount claimed or to the underreported tax, not your entire taxable income. If the IRS determines negligence in following tax laws, this penalty may be applied.

In severe cases, such as tax fraud, the penalty can skyrocket to 75%. So, if you’re anticipating an accuracy-related penalty due to incorrect filing or calculation of your ERC total, it’s advisable to start saving now. You might also want to withhold a portion of your ERC refund until the audit is resolved.

Consulting with tax professionals can provide guidance during this complex process.

HOW TO PREVENT AN ERC TAX AUDIT

Avoiding an ERC tax audit involves several steps:

1. File your taxes accurately.
2. Enlist the help of a trusted accountant, ERC tax specialist or tax preparer.
3. Maintain meticulous payroll and tax records.

Ensure your tax return is error-free by reviewing it multiple times. Inaccuracies and inconsistencies can trigger an audit, so it’s crucial that your documentation is precise and matches the data you’ve reported.

Enlisting the help of a trusted accountant, ERC tax specialist or tax preparer is also crucial. Make sure they’re reputable and offer audit protection. This professional help can be invaluable in navigating the complex tax landscape, particularly when it comes to the Employee Retention Credit (ERC).

Maintaining detailed payroll and tax records is another important step. This not only helps to ensure accurate filing, but also equips you to respond effectively if you’re audited.

Here are some additional tips to prevent an ERC tax audit:

• Only work with reputable ERC specialist companies.
• Be wary of companies promising too-good-to-be-true results.
• Make sure they offer audit protection.
• Keep diligent records.
• Document everything related to your payroll and taxes. This includes employee hours, costs, and any changes in employment status.

SHOULD YOU CLAIM THE ERC WITH THE INCREASE IN IRS AUDITS?

Despite stepping up their audit efforts, the IRS’s increased scrutiny shouldn’t deter you from claiming the ERC if your business is eligible. The prospect of an audit certainly feels intimidating, but if you’re eligible, you’re leaving money on the table by not claiming this credit.

However, claiming the ERC isn’t a simple checkbox. It requires a thorough understanding of the eligibility criteria and precise calculation of the credit amount. The risk of an audit increases if these aspects aren’t carefully managed, making it crucial to have a grasp on the finer details of the ERC. Missteps can trigger an audit, but they can also lead to penalties or a demand to repay the credit if you’re found ineligible upon review.

If you want to look into making an ERC claim yourself you might find the Tools and Resources for calculating the ERC post as a useful starting point .

To minimize the risk of an audit, ensure that your claim is well-documented and accurate. This involves careful record-keeping and a detailed understanding of your business’s operations during the eligibility period. Note that if you’ve received a PPP loan, you must ensure you’re not claiming the ERC for the same payroll costs.

An experienced accountant or a trusted third-party ERC provider can be invaluable in this process. They can guide you through the eligibility criteria, help calculate the credit accurately, and ensure you have adequate documentation to support your claim.

Conclusion

As the IRS launches its ERC audit program, being well-prepared is your best defense. Understand the reasons for audits, their implications, and how to safeguard your claim.

Be aware of ‘ERC mills’ and their red flags. Despite the increase in audits, responsibly claiming the ERC can still be beneficial.

Navigate this complex process with confidence, knowing you’re equipped to handle any IRS scrutiny. It’s all part of ensuring your business’ finances are in order.