How to Handle an ERTC Audit Without Disrupting Business Ops
You know that the IRS can audit your tax return, but you may not have known that it audits ERTC claims. IRS scrutiny for ERTC claims has recently increased because of the prevalence of fraudulent third-party submissions. If the IRS audits your claim, you might have to pay back your tax credit, plus interest.
ERTC audits are never fun, but it’s possible to go through one without disrupting your business. Here’s how to ensure a seamless ERTC audit process.
Follow the Instructions in the Audit Notice
When the IRS wants to perform Employee Retention Tax Credit audits, they will notify a business owner through the mail. In this notice, you’ll find:
- The reason why the IRS is auditing you
- The name and contact information of the auditor
- Deadlines for your response
- Instructions on what to do next
To avoid an in-person audit, carefully follow the instructions in the letter and submit all requested documents well before the deadline.
Gather Supporting Evidence of Eligibility
Ensuring ERTC eligibility is the smartest way to nip audits in the bud. You must meet one of these eligibility requirements:
- Your business closed, fully or partially, because of a government order that limited commerce, group meetings, or travel.
- You had a big drop in gross receipts (20% or more compared to the same calendar quarter of the previous year for 2021 and a drop of at least 50% for 2020).
If you qualify because of a full or partial shutdown, you’ll need proof such as:
- Evidence of a citywide curfew that limited your hours of operation
- An order from the mayor that forced all non-essential businesses to close
- A local health department order mandating that your business close for cleaning
Your business may also qualify because of supply chain disruptions, but the IRS analyzes such claims carefully. To qualify, the supply chain disruption must have made it impossible for your business to carry out its essential functions. You’ll also need to prove that you couldn’t find similar goods or supplies elsewhere, regardless of cost.
For the gross receipts test, you’ll need to provide:
- Total sales
- Amounts received for services
- Investment income
- Income from outside services
Tax-exempt organizations must also provide the cost of operations and expenses related to earning, raising, or collecting those costs.
Hire an Experienced Tax Professional
The easiest way to handle an ERTC audit is to work with a tax professional. These pros can walk you through the process and help you gather evidence of your eligibility. They can also ensure you submit the proper documentation on time to avoid penalties and disruptions to your business.
Why Would the IRS Audit Your ERTC Claim?
The IRS audits ERTC claims for many reasons, including:
- Filing a claim when you’re not eligible
- Claiming wages paid with PPP loan money
- Claiming wages paid to employees who provided services to you (applicable to large employers with at least 500 employees. Large employers can only claim wages paid to employees who did not provide services to them).
- Claiming wages paid to independent contractors
- Filing Form 941-X without Form 941 on file
- Claiming more than the maximum ERTC amount allowed
- Errors in calculations
- Failing to attach proof of eligibility
Need Audit Services for ERTC Claims?
If the IRS has sent you an audit notice, we advise you to contact our attorneys at Dayes Law Firm as soon as possible. Our lawyers are highly experienced at ensuring ERTC eligibility and can guide you through ERTC audits with minimal disruptions to your business. For a free consultation on ERTC compliance reviews, contact us at 800.503.2000.