With the Employee Retention Tax Credit (ERTC) becoming more well-known and ERTC scammers encouraging businesses to file inaccurate claims, ERTC audits are in full swing now. As a business, you need to understand how these audits work so you can avoid unnecessary scrutiny.
An ERTC claim audit is similar to a tax audit, but is focused on the ERTC claim paperwork and documentation. If you have any questions or need help with your ERTC claim, don’t hesitate to contact the ERTC team at Dayes Law Firm for a free consultation.
ERTC Audit Procedures
The Employee Retention Tax Credit program allows eligible businesses to claim thousands of dollars from the IRS for paying wages to employees during the COVID-19 pandemic. To qualify, businesses must meet strict financial criteria. If you qualify, you need to calculate your eligible wages per employee per quarter, as the IRS does not take care of this for you.
While the ERTC offers a lot of potential cash, it also has a lot of potential for error. The IRS is now cracking down on businesses that either made mistakes in their claim, missed some of the documentation, or committed fraud.
The IRS selection criteria for Employee Retention Tax Credit audits are based on a few factors relating to fraud, like the claim size, business location, and industry. For example, if eight small-sized coffee shops in North Carolina request refunds of roughly $50,000, but one requests $500,000, the IRS may see this large claim as a red flag. The IRS may also conduct random ERTC audits of businesses claiming benefits, regardless of whether the claim is unusual or has flags.
Once the audit begins, the IRS will collect all material relating to the claim, like tax forms, payroll records, and financial statements. Beyond this, the auditor will likely ask for supporting documentation to learn how the business calculated its claim. The entire ERTC audit process may take around a year, though it depends on the complexity.
Basic Tax Audit Procedures
Unlike ERTC compliance reviews, tax audits are typically prompted by your business’s annual tax return. If the IRS suspects faulty information on your tax return, they will send you an audit notice through the mail, notifying you of the upcoming in-person or mail review. In some cases, the audit will only cover documents relating to the matter at hand.
However, in more high-caliber, complex scenarios, the IRS may want to review nearly all of your business finances.
Differences Between an ERTC Audit and a Tax Audit
The IRS scrutiny for ERTC claims is often much higher than for tax returns because the process is highly complex, leading to a higher margin for error. At the same time, businesses stand to gain a lot, meaning the government wants to ensure that everyone files claims correctly.
The other main difference between ERTC audit procedures and regular tax audits is the timeline. Your business could be audited for a particular tax year, though tax audits are typically rare. On the other hand, the IRS will perform mass reviews of all ERTC claims to ensure accuracy, meaning you could receive an audit at any time.
Preparing for an ERTC Tax Audit
If you’ve already submitted an ERTC claim or are thinking about doing so, you may want to prepare for an audit in case one occurs. We recommend maintaining all your documentation during the process, following the ERTC guidelines, and conducting an internal audit to locate potential errors. If you need help ensuring ERTC eligibility, contact Dayes Law Firm. We offer audit services for ERTC claims to help you navigate the process with the IRS smoothly. Call 800.503.2000 to speak with an experienced ERTC attorney about your claim.