3. Document ERTC calculations
Having all documentation to hand may just prevent them from needing to complete a full ERCtax credit audit.
And, even if an audit still occurs, the documentation will help clarify any inconsistencies and ensure the process is less painful than it needs to be.
4. Double-check ERTC calculations
As a responsible person in your business, you should double-check ERTC calculations toensure their accuracy.Any errors or discrepancies in their claim may increase the risk of an audit.
5. Respond to any IRS requests promptly
If the IRS requests additional documentation to verify your ERTC claim, respond promptly and provide the requested documentation. Delaying or ignoring an IRS request could significantly increase the risk of an audit.
ERC STATUTE OF LIMITATIONS: WHAT IS THE ERC AUDIT PERIOD?
TheERTC statute of limitationsis3 years from the date the tax return was filed or the due date of the return, whichever is later.
However, if you’ve filed an amended return, theERC audit statute of limitationsstarts from the amended return file date.
On top of that, the statute of limitations for auditing the ERC depends on various factors:
- Type of tax return filed
- Whether you’ve filed an amended return
- Audit circ*mstances
If fraud or intentional misrepresentation is suspected,the IRS can audit the business at any time, regardless of any statute of limitations.
HOW DO I PREPARE FOR AN ERC AUDIT?
To prepare for an ERC audit, take the following steps:
1. Review the notification letter
The IRS will typically send a notification letter to inform you that your business will be audited.
The letter will provide details on the scope of the audit, the IRS contact person, and the timeframe.
Review the letter carefully and take note of any deadlines or requirements.
2. Gather all relevant documents
Ensure all relevant documents related to the ERC are in order, such as payroll records, tax returns, and other supporting documentation.
You’ll need these to respond to the IRS’s requests and todemonstrate that the business is eligible for the credit.
Here are some tips on how to maintain your documents in case of an IRS audit:
- Organized records:Keep your tax-related documents organized and easily accessible. Consider using a spreadsheet or software program to help organize your records.
- Proof of deductions:If you claim deductions on your tax return, make sure you have the proper supporting documentation. This includes receipts for charitable donations, medical expenses, and business expenses.
- Employment records:Keep detailed records of your employees’ wages, taxes withheld, and benefits provided. This includes payroll records, W-2 forms, and other employment-related documents.
- Communication records:Retain any communication with the IRS, including letters, emails, and phone calls. This will help you keep track of any requests for information or other correspondence related to the audit.
Remember that the burden of proof is on you, the taxpayer, to provide documentation to support your tax return filings.
By maintaining organized and accurate records, you can help make the audit process go more smoothly and increase your chances of a favorable outcome.
3. Cooperate with the IRS
It’s really essential that you fully cooperate with the IRS and provide all requested information promptly.
Failure to cooperate with the IRS can result in penalties and additional scrutiny (more on penalties coming up!)
4. Appeal the decision, if necessary
You may have the right to appeal the decision through the IRS’s appeals process or through litigation in court.
However, this can be lengthy and may require additional time, cost and effort on your part. Naturally, this can be worth it.
With the above in mind, you really need to be aware of theemployee retention credit scamsaround, which coax you into either giving sensitive information or pretending that you’re eligible for an ERC claim when you aren’t!
Is ERC subject to single audit?
The ERC isn’t subject to Single Audit.Single audits, also known as Uniform Guidance audits, are specific types of audits required for entities that expendfederal awards, grants, or financial assistancefrom the U.S. federal government. The ERC is a federal tax credit, NOT one of these.
ERC AUDIT PENALTY GUIDANCE:
AnERC audit penaltycan result inadditional tax liabilities, interest charges, and potential legal consequences:
- Underpayment of taxes:Businesses may be required to pay back the erroneously claimed ERC amount, resulting in additional tax liabilities.
- Accuracy-related penalties:In cases where the IRS deems that the errors were due to negligence, disregard of tax rules, or substantial understatement of income, accuracy-related penalties may be imposed. These penalties are calculated as a percentage of the underpaid taxes.
- Interest charges:The IRS may assess interest charges on the underpaid taxes from the due date of the tax return until the date of payment.
- Potential legal consequences:In cases of intentional fraud or willful misconduct, businesses may face criminal charges, including fines and imprisonment.
What is the penalty for false ERC claims?
The penalty for false ERC claims is20% of the excessive amount claimed.For example, if your ERC claim is $6,000 but, in actuality, your eligible amount was only $5,000, the excessive amount is $1,000 and your penalty is $200 (20% of $1,000).
In addition, the IRS may apply an“accuracy-related penalty if there is not a reasonable cause.”Moreover, interest on any ERC penalty could be applied
Note that this penalty isn’t specific to the ERC but is theIRS’ general guidanceon false credit claims.
Mitigating the Risk of ERC Audit Penalties:
To minimize the risk of ERC audit penalties, it’s essential for businesses to:
- Maintain accurate documentation:Keep thorough records and documentation supporting the eligibility criteria for the ERC, including evidence of qualified wages and the impact of the COVID-19 pandemic on your business operations.
- Seek professional assistance:Consider working with experienced tax attorneys or tax professionals, such as Brotman Law, which specializes in ERC matters and can provide guidance and ensure compliance with IRS regulations.
- Conduct internal reviews:Regularly review and reconcile your ERC claims to identify any potential errors or inconsistencies proactively. This can help address issues before they become a cause for concern during an audit.
KEY TAKEAWAYS ON AN IRS ERC AUDIT
There are undoubtedly certain things you can do to mitigate the chance of the IRS auditing your ERC claims.
However, this doesn’t guarantee that you’ll totally avoid the audit from occurring. And, even if you do get audited, all isn’t lost.
Keeping all calculations and documentation updated and to hand will greatly help you. And, if you’re still stuck, you can always get in touch with the team here at Brotman Law so we can see how we can help.
