The IRS Announces That They Will Begin Auditing Employee Retention Credit Claims
In 2020, the Employee Retention Credit (ERC) was created by the CARES Act to assist businesses that were impacted by the COVID-19 pandemic. With the ERC, an eligible business may claim a refundable credit up to 70% of qualified wages paid to employees, up to $10,000 per employee, per quarter, for 2020 and 2021.
However, utilizing ERC may put a business at risk for audit if the credit is claimed without eligibility. There are many third parties who have gotten into the business of assisting businesses with claiming ERC. As often happens, there is considerable perceived abuse. The Internal Revenue Service (IRS) has recently communicated that it will begin to audit ERC claims to ensure that the credits were taken appropriately, confirming that credit(s) were taken in compliance of the law, and determining if there was any potential fraud.
If your business claimed the ERC, below is a list of potential audit triggers and what to expect if your business is under IRS examination:
The factors below could potentially increase the likelihood of audit when considering ERC claims.
- A large ERC claim in correlation to your payroll tax liability;
- A claim for employees that either received excess wages or who are not fully eligible;
- A claim for tax periods when the business was not completely or partially closed due to government orders, or if there was not a notable decrease in the overall gross receipts; and
- Negligence in maintaining proper documentation/proof to substantiate the ERC claim. These records should include payroll records, bank statements, any relevant financial statements and back up to show the business disruption.
If the IRS contacts you regarding an audit of your ERC claim, you should consult with a tax professional as soon as possible. A tax professional can help you with the following:
- Analyze the ERC credit eligibility and determine if there were any errors;
- Assist with review and organization of documentation that supports the ERC claim;
- Handle the communications with the IRS examiner and screen all questions and/or requests from examiner;
- Lead negotiations with the examiner and work to resolve any discrepancies and/or issues that arise; and
- Handle any appeal process that may emerge after the audit concludes.
Again, the Employee Retention Credit was a beneficial tax credit that aided in business survival during COVID-19; however there are risks involved with utilizing the credit, and your business should ensure that they maintain good compliance, record keeping and consult with a tax professional. Taking time to review these items may reduce the audit potential or issues that could arise when under examination.
