What are ERC credits? Were you truly eligible for them? Are you at risk of an ERC credit audit? Find out this and more, here.
What is an ERC Credit Audit?
The Employee Retention Credit (ERC) was a tax credit for qualified businesses during the COVID-19 pandemic. The U.S. government provided it to encourage businesses to retain their employees during that challenging economic time.
It was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. It has undergone several changes and extensions since then.
A few years later, it has become increasingly evident that the IRS received an excessive number of fraudulent applications. Consequently, the IRS is now intensifying its efforts in conducting audits related to employee retention credits.
To refresh your memory, here are some key points about the ERC:
Eligibility: To be eligible for the ERC, businesses must meet certain criteria. For example, the business must be experiencing a significant decline in gross receipts or being subject to a government-mandated shutdown due to the COVID-19 pandemic.
The specific eligibility requirements may vary depending on the year and legislation in place.
- Credit Amount: The ERC provides a tax credit equal to a percentage of qualified wages paid to eligible employees. The credit percentage and maximum credit amount may vary based on the specific legislation in place. Generally, it has been up to 70% of qualified wages per eligible employee, up to a certain limit.
- Qualified Wages: Qualified wages are the wages and compensation paid to eligible employees during the eligible periods. The definition of qualified wages and eligible employees can vary based on the legislation in effect. If not, this may be the cause of an ERC credit audit.
- Employee Limits: The number of eligible employees a business can claim an ERC credit for may have restrictions, such as a maximum number of employees or different rules for businesses of different sizes.
- Recordkeeping: To claim the ERC, businesses are required to maintain documentation and records to support their eligibility and the amount of credit claimed.
“The IRS is looking at companies who may be unfairly claiming [the ERC],” says Forbes. “And also, at firms promoting assistance to them who the IRS thinks may be bending the rules. Congress provided vast pandemic tax relief in various forms. One of the most popular and enduring ones that is still drawing fire is the ERC.”
Should You Be Worried?
The IRS carefully examines certain signs that indicate a potential problem or deceitful request for the ERC:
- Requesting credits for employees who were not genuinely kept on the payroll or paid.
- Seeking an ERC credit without meeting the necessary criteria for revenue loss.
- Trying to get credits for multiple connected companies as if they were a single employer.
- Asking for credits based on wages for employees who did not perform any work.
- Attempting to claim the credit for past tax years retroactively.
In other words, if you’ve stretched the ERC eligibility criteria, anticipate additional scrutiny from the IRS.
According to the IRS in a news release, the IRS Commissioner told a group of tax professionals that they’ve “increased audit and criminal investigation work on these claims, both on the promoters as well as those businesses filling dubious claims.”
What to Expect if You’re Targeted for an ERC Credit Audit
The IRS will notify you by mail if they select you for an ERC credit audit. The letter includes personal information about your business. It also describes what they are specifically auditing. Finally, you’ll find options for how to respond to the IRS and a deadline for doing so.
Once you receive a letter from the IRS about an ERC credit audit, contact a trusted tax professional immediately. The IRS is looking for specific evidence that your business didn’t qualify for the ERC credits.
You may have submitted your application in good faith, but if the IRS doesn’t see the evidence during the audit, they may conclude that you don’t have sufficient evidence. In that case, it’s likely they will assess a penalty and require that you pay them back.
On the other hand, a seasoned and reputable tax professional can navigate the audit process successfully, which allows you the best possible outcome in your case.
If you receive a letter from the IRS, contact Advanced Tax Team immediately. We have a qualified team of talented tax professionals who can represent you before the IRS.
We offer a free phone consultation with no obligation. We’ll discuss your circumstances and the information in your letter. We’ll talk about your goals, then we’ll go over your options.
Contact us today at (877) 469-1651. We’ll get started immediately, and you can sleep better tonight.
-  “Frequently Asked Questions About the Employee Retention Credit.” Internal Revenue Service, 14 Sept. 2023, www.irs.gov/coronavirus/frequently-asked-questions-about-the-employee-retention-credit.
-  “IRS Commissioner Signals New Phase of Employee Retention Credit Work.” Internal Revenue Service, 11 Sept. 2023, www.irs.gov/newsroom/irs-commissioner-signals-new-phase-of-employee-retention-credit-work-with-backlog-eliminated-additional-procedures-will-be-put-in-place-to-deal-with-growing-fraud-risk.
-  Wood, Robert W. “IRS Tips on Employee Retention Credit Refunds, ERC Audits & Fraud.” Forbes, Forbes Magazine, 25 Aug. 2023, www.forbes.com/sites/robertwood/2023/08/23/irs-tips-on-employee-retention-credit-refunds-erc-audits–fraud.