Common Evidence IRS Uses To Audit ERTC Claims

December 25, 2023
Dayes Law Firm

The Employee Retention Tax Credit (ERTC, a.k.a. ERC) aims to reward business owners who retained their employees despite losses and government-issued restrictions during the COVID-19 pandemic. However, business owners who claim the ERTC without thoroughly understanding the eligibility criteria risk an IRS audit and a criminal investigation. 

When does the IRS suspect fraudulent claims, and what could act as a red flag that triggers closer scrutiny? Let’s examine the possible relationship between claiming the ERTC and IRS audits. 

Will Every ERC Claim Lead to an Audit?

Some business owners hesitate to file tax return amendments because of the recent IRS warnings about non-compliance risk in ERTC claims. However, it’s important to understand that not every ERC claim will trigger an audit. The IRS will usually suspect fraud when something in the documentation is inconsistent or suspicious. 

Some issues that may prompt an IRS audit include:

  • Incomplete or wrong information on tax return forms
  • Lack of alignment between the ERTC amount you claim and income statements, payroll records, and other tax-related documentation
  • Unreasonably high claim amounts that are inconsistent with your number of employees and eligible wages
  • Technical issues like typos, math errors, missing taxpayer information, etc.
  • Numbers that are too round and tidy throughout your tax forms

Additionally, if your business has a history of non-compliance or incorrect filings, the IRS is likely to audit your claim. 

Documents You May Need to Prove Eligibility

To verify your ERTC eligibility, the IRS may ask you to produce various documents, including:

  • Financial statements
  • Documentation confirming restrictions in your business operations
  • Payroll documentations
  • Receipts and invoices

This documentation should show that your business had to reduce or cease its operations because of regulations related to the COVID pandemic, that your gross receipts suffered a significant decline, and that your claim only includes eligible wages. Any missing or inconsistent documentation could serve as grounds for challenging your claim. 

The ERTC and IRS Audits: What To Expect

After reviewing your claim, the IRS may ask you to provide additional supporting documentation. If you respond to any communication from the IRS quickly and supply the required evidence, you may be able to avoid an audit. 

If you receive a notification letter informing you of an upcoming audit, seek tax professional guidance immediately. A tax lawyer can explain how to prepare for an audit and avoid or reduce potential penalties. 

During an ERC audit, the IRS will scrutinize your tax documentation. If you already collected the ERTC benefit erroneously, you’ll need to pay it back. The IRS may also impose penalties if they uncover income understatements or other violations of tax laws. Intentional fraud may lead to criminal charges.

How to Avoid an IRS Audit When Claiming the ERTC

You’re much less likely to encounter an IRS audit if you:

  • Review all guidelines for claiming ERTC benefits to confirm that your business qualifies and that you only include eligible wages in your calculations
  • Consult a trusted tax lawyer who can help you check eligibility criteria and ensure your claim provides complete, accurate information
  • Save all documentation related to your ERC claim and be ready to provide it if the IRS decides to double-check your records

Dayes Law Firm: Helping Your Business Ensure Compliance With IRS Guidelines

Are you concerned that filing for the ERTC might put your business under scrutiny and trigger an IRS audit? Our experienced tax lawyers can explain the link between the ERTC and IRS audits and help you ensure compliance with IRS regulations as you claim tax benefits. 

Give us a call at (800) 503-2000 or fill out our online form to schedule your free consultation.