What Are the Most Bizarre ERTC and IRS Triggers and Audits? 

December 18, 2023
Dayes Law Firm

IRS audits are relatively rare, with only about 4 of every 1,000 tax returns at risk for an audit. If you filed an Employee Retention Tax Credit (ERTC) claim, your chances of ERTC IRS audits are somewhat higher. The IRS has already slated thousands of ERTC claims for an audit. 

You already know that filing your claims and returns accurately with as much information as possible is key to avoiding an audit (hint: don’t make obvious mathematical errors or forget to fill in your name), but what are some of the less obvious ways you could trigger an audit? 

Keep reading to find out some of the more bizarre audit triggers and learn how to engage in risk-reduction tactics. 

1. Being in a “High-Risk” Industry 

High risk in this context doesn’t mean dangerous, like ice road truckers or construction workers. Rather, high risk means an industry that is ripe for cash transactions that result in underreported income. Car washes, cannabis businesses, restaurants, and hair salons are prime examples of high-risk industries known to play fast and loose with the rules of tax compliance. 

If you own one of these businesses and filed an ERTC claim, be careful that you’ve kept careful employee records. If you are paying people under the table and then trying to claim their wages for ERTC credit, this could lead to trouble. 

2. Changing Your Business Structure 

A tax advisor may have suggested forming an LLC, S-Corp, or other business structure to save on taxes. This is often a wise financial move, but it may increase your risk of an ERTC audit if the timing seems suspicious. 

3. Making Multiple Claims for the Same Period (or Employee) 

This move is risky and potentially criminal, and it involves filing more than one ERTC claim for the same quarter in hopes that the IRS won’t notice. Spoiler alert: they probably will. 

The same goes for duplicating employee records to increase the size of your claim. Anything that looks suspicious is a reason for the IRS to take a closer look. 

4. Inconsistencies in Tax Filings 

If you file an ERTC claim and the wages are significantly different across various tax documents, the IRS is going to assume something fishy is going on. For this reason, we recommend any ERTC claim is consistent with your payroll records and other employee documentation. 

5. Experiencing Unusual Fluctuations in Wages 

Though some industries are more subject to wage fluctuations than others, given that human beings need to eat and keep a roof over their heads, massive swings in wages can be a red flag that something is amiss. 

The same goes for wide variations in headcount. If you go from having 20 employees to 80 overnight, and then downsize back to 20, the IRS is bound to raise an eyebrow. 

Before you argue that your business is seasonal or the pandemic caused these fluctuations, keep in mind that the IRS has records of every business in your industry. The government will use those records in aggregate to identify any potential outliers. 

To ensure that you don’t unnecessarily raise any red flags, be sure to keep detailed records and be honest when it comes time to file your tax return or claim the ERTC tax credit. 

Contact an Experienced Legal Tax Professional for ERTC Help 

Whether you need help determining ERTC eligibility, filing an ERTC claim, preparing an audit defense, or negotiating a tax resolution strategy due to ERTC IRS audits, Dayes Law Firm can help. We fight for America’s small businesses and would be happy to help maximize your ERTC recovery or assist you with IRS representation. Give us a call at (800) 503-2000 or fill out our online form to schedule your free consultation.