Updated: Jun 27
Across the United States, thousands of businesses have claimed the Employee Retention Credit (ERC) in an attempt to help soften the financial blow caused by the pandemic. Anyone who applies for the ERC tax credit could be subject to an audit from the IRS. By hiring an experienced ERC consultant, you could avoid the risk of an audit for false claims or inaccurate information on your application.
What Is an ERC Audit?
An ERC audit can be a very serious matter for any business owner who may stand to lose thousands or millions of dollars if their claim is found to be fraudulent. An ERC audit is essentially an investigation, where an IRS agent is going to take an extremely in depth look at an employer's ERC claim. It is a lot like a traditional IRS audit, but much more focused, which allows an IRS agent to undertake the audit more thoroughly and with additional scrutiny.
Main Reasons for ERC Audits
There are multiple reasons why a business may be selected to undergo an ERC audit. For instance, if the business was never eligible to receive the ERC in the first place, but applied for it anyway. To be eligible to take advantage of the ERC, a business had to have met one of two conditions. The first condition being that the business had to have sustained a full or partial shutdown due to an order from an appropriate governing body limiting commerce, travel, or group meetings due to the pandemic. The second condition being that a business had to have had a significant decline in gross receipts when compared to the same quarter in 2019. If a business met just one of these conditions, they were eligible to receive the ERC. However, if a business did not meet either of these conditions, then they were not eligible. If a business was not eligible to receive the ERC and attempted to claim it regardless, then that would be a fraudulent claim, and suspicion of such is a valid reason for the IRS to conduct an ERC audit.
Another reason for an IRS audit is if the IRS has reason to believe that the amount a business claims they should receive from the ERC is incorrect. This would usually be due to a miscalculation when calculating qualified paid wages. This miscalculation could either be the result of an innocent mistake, or a purposeful attempt to receive more from the ERC than a business is actually qualified for. Regardless of why the miscalculation happened, the IRS audit will reveal it and adjust it appropriately.
Will the IRS Notify Me About an ERC Audit?
There’s no need to worry that a surprise bill will show up demanding repayment of ERC funds. The IRS will always notify you that you have been selected for an audit. The first attempt at contacting you will always be in the form of a letter. After notifying you of the audit via letter, the IRS may call you to set up an appointment or to discuss the details of your audit.
How to Avoid an Audit from the IRS
The simplest way to avoid a visit from an IRS agent is to ensure that your ERC claim is filed correctly, honestly, and without errors. This is easier said than done, as there are a lot of rules and conditions when it comes to filing an ERC claim. There are also the calculations required, where one simple mistake could result in a fraudulent claim. You also want to make sure that you are only including eligible employees in your calculations. While filling out an ERC claim many business owners wondered, are family members eligible for ERC? The answer is no, you do not get an ERC credit for family members you employ. Many employers made this mistake, and opened themselves up to an audit.
To ensure that your ERC claim is done correctly and honestly, it really is necessary to hire an ERC consultant. These are professionals who know and understand all of the minutiae of the ERC claim process, including the eligibility rules, the calculations, and even the ERC family attribution rules. It is important to hire a reputable consultant, as there is a growing number of scams targeting businesses going through the ERC claim or audit process.
Supporting Documentation for Your ERC Application
The amount of documentation you will need in case of an audit can seem quite daunting, but it will be invaluable in the event that you are audited. First, you will need documentation supporting your eligibility to receive the ERC. This includes, orders from the government for your business to shut down, records proving that more than a significant portion of your business was suspended due to government order, records showing a significant decrease in gross receipts, records showing an employee was being paid when they were not providing a service, and records showing the amount of qualified wages paid to specific employees.
In addition, you will also need documentation supporting that the calculations in your ERC claim are correct. This includes, a copy of any form 7200 that you submitted, copies of any federal tax returns (forms 941, 941-X, and W-2), and any documentation showing the amount of allocable qualified health plan expenses.
If you have all of this supporting documentation, you will be well prepared should you undergo an ERC audit.
A trusted ERC consulting firm can help you through the process and get you in line with the IRS faster to get your application approved. They will guide you through every step of the process, ensuring that you are filing your application correctly so you can reduce the chances of your application getting denied or delayed.
The team at Five Star ERC Experts will work closely with you every step of the way. With over 22 years of tax experience, we have helped thousands resolve their IRS tax problems. You can feel confident with an A+ rating from the BBB along with our goal of always putting the interest of our clients first.