Certain terms in the English language can raise your anxiety level just by hearing them spoken out loud. When it comes to the IRS, “audit” is one of those terms that seems like it should be accompanied by sinister organ music swelling behind it. But there are ways to ease that stress and worry when it comes to your clients’ Employee Retention Credit filing.
As expected, businesses across the country are getting IRS notices—known as an Information Document Request—requesting additional information about their ERC claims. Whether a business is selected at random or with some specific reason, the first thing to remember is that receiving such a notice is absolutely no indication that anything is wrong with the ERC filing.
What it does mean is that, like all filings with federal agencies, there are operations in place to test processes and ensure that tax filings across the country have been executed properly. It is vital to make sure your clients are protected and compliant as you go through the audit process.
Start Preparing Now
What is the IRS looking for? Based on everything we’ve seen so far, eligibility is its primary focus—that is, whether taxpayers and applicants correctly calculated the amount of paid tax, their eligible employees and circumstances, and the impact of the pandemic on their business.
Another but no less important element being examined is whether taxpayers and applicants filed amended returns to pay income taxes on the ERC funds. The first step is to create a file with all the support documentation to substantiate the ERC filing. Do not wait until the IRS contacts your clients—confirm and document all the specifics of their ERC claims. This includes all your gross receipts, if filing under the revenue reduction qualifier, or records of shutdown impacts if the client used another method. Remember that clients must keep all of this documentation on file for at least four years after the date the tax is due or paid—whichever date is later.
The initial requests we’re seeing are asking for details confirming the eligibility calculation. The IRS may ask for any or all of the following information:
- Lists of employees and owners.
- Payroll logs.
- Any related parties with an interest in the business.
- Previously filed tax forms.
- Notices of suspension of operations during the eligibility period.
- Gross receipts for 2019, 2020, and 2021 Paycheck Protection Program application and loan forgiveness information.
Some of the information requested may be quite detailed. The IRS may request to see wage allocation between ERC and PPP funds. You may be required to provide spreadsheets breaking down annual gross receipts for 2019, 2020, and 2021.
Without someone who has particular expertise in these areas, there are many places a business might even unknowingly fall short in the information required for their filing.
Things to Think About
Aggregation Rules: These rules are very complex, and eligibility requirements have changed over time, so understanding the requirements and applying the rules to each specific situation can be difficult.
Full-Time Employee Roster: It’s important to remember that the understanding of the number of full-time employees is different for the ERC process than it is for other IRS credits. For the ERC, it is based on the average number of full-time employees in 2019 who worked 30 hours per week or 130 hours per month during each calendar month of the year. The preparer will then figure an average of that number to come up with the employee count.
Claiming an ERC credit follows the same rules as when you claim a tax deduction on an income tax return. That is, the information filed is certified as accurate and truthful under penalty of perjury. Companies claiming the ERC should confirm every aspect of the analysis in the claim.
The ERC is a high-value refundable tax credit that can make a real difference in the finances of business owners. Accurate records of the impacts of Covid-19 restrictions will help your clients feel confident in their ERC eligibility. As a trusted expert, you may want to work with an ERC specialist that stays on top of all of the established and evolving IRS requirements.
Whether you file for your clients yourself or with a partner, now is the time to take action and prepare backup information for your clients’ ERC filings to reduce the fear of a possible audit and know that all records are in order.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Sunshine J. Chapman is president and founder of ERC Provider, a niche consulting firm dedicated to helping businesses navigate the details and realize the benefits of the ERC program.
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