Is Your Business at Risk for an Employee Retention Credit Audit?
Everyone was affected in some way by the COVID-19 pandemic. Many small businesses struggled to stay afloat and meet payroll. To incentivize businesses to keep paying their employees during such a challenging time, the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided for the Employee Retention Credit (ERC). A refundable tax credit, the ERTC was offered to eligible businesses who continued paying their employees during the pandemic. The credit had the potential to be substantial; however, not everyone who claimed the ERC met the requirements for eligibility.
First off, your business must be considered an eligible employer. To qualify as an eligible employer, your company must have had either (1) “a significant decline in gross receipts” between March 13, 2020 and December 31, 2021, or (2) operations that were “fully or partially suspended due to orders from an appropriate governmental authority” (IRS Notice 2021-20). Once your business is established as an eligible employer, you need to meet one of the following conditions to receive an ERC:
- Sustained a full or partial suspension of operations limiting commerce, travel or group meetings due to COVID-19 and orders from an appropriate governmental authority; or
- Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021; or
- Qualified in the third or fourth quarters of 2021 as a recovery startup business.
The IRS also has an extended statute of limitations to audit ERC claims, meaning they have additional time beyond the most recent tax year to conduct these examinations.
Additionally, the IRS has warned of unscrupulous tax preparers who pushed the ERC when a business may not have strictly met the eligibility criteria. Now, the IRS has issued several alerts and notices indicating a heightened likelihood of audits for businesses that claimed the ERC. Here’s what you need to know if your business received ERC funds.
If you receive a notice of audit, it is important not to panic and not to ignore it! A notice alone does not indicate the ERC was taken in error or that your business will have to repay the credit. An ERC audit might require you to produce lists of employees and proof of eligibility, among many other records.
Given the likelihood of ERC audits, businesses should make an effort to get ahead of the game and consider hiring a qualified Orange County tax attorney who can help get your business audit-ready before you even receive an IRS notice. And if you claimed the ERC, consider consulting with an experienced Orange County tax attorney who can review your filings and assist you in the event you are selected for audit.
Allison Soares is a partner and tax attorney at Vanst Law. Before starting her own practice, Soares was a partner at a tax law firm where she honed her skills handling a wide variety of tax and employment-related cases. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.