What to Do if You Get an IRS Notice Related to Your ERC Claim

September 14, 2023
Dayes Law Firm

Businesses claiming the Employee Retention Tax Credit (ERTC), also known as the Employee Retention Credit (ERC), should adhere to the appropriate IRS guidelines. The ERTC and IRS guidelines are descriptive in determining whether a company qualifies for the ERC tax refund for wages paid during the peak of the pandemic in 2020 and 2021.

What Is the ERC?

When you submit the Employee Retention Credit (ERC) adjustment on Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund), you can get a refund from payroll taxes paid on qualifying wages from 2020 and the first three quarters of 2021.

Employers can get up to $5,000 per full-time employee paid during 2020 and up to $7,000 per quarter per full-time employee paid during the first three quarters of 2021 for a total of $26,000 refunded.

To qualify for the ERC, your company must have experienced a full or partial shutdown in response to a government mandate or a significant decline in gross receipts during eligible quarters of 2020 or 2021.

When Can the IRS Audit Your ERC?

The IRS Statements and Announcements page lists the latest news about policies for the ERTC and IRS guidelines to qualify for the ERTC. Ensuring you submit the correct statements, documents, forms, and other information when you file Form 941-X can help you avoid an IRS audit when submitting your ERTC claim.

The IRS might choose your ERC application to ensure you’ve calculated the credit correctly. Filing for the credit won’t automatically trigger an audit on its own. Still, the IRS may begin an audit for your claim if it suspects an error or misrepresentation, which can include:

  • Errors or previous non-compliance on prior year returns
  • Incomplete information on your original Form 941
  • Discrepancies between your ERTC value and other statements and documentation
  • Excessive claims for the ERTC not supported by the original wages paid or number of employees reported on your Form 941

You should always maintain accurate records and retain statements and other financial documents in case of an IRS audit. The IRS has 300 agents focused on ERTC claims for auditing, reporting fraud attempts, and monitoring discrepancies.

Do You Qualify for the Employee Retention Credit Claimed on Your 941-X?

To qualify for the ERTC, your company must have been subject to mandatory full or partial shutdowns in applicable quarters of 2020 or 2021 or have seen a significant decline in gross receipts. If you intend to claim the ERC because of decreased revenue, your gross receipts must demonstrate:

  • A reduction by 50% or more in gross receipts for qualifying quarters of 2020 compared to the corresponding quarter in 2019 OR
  • A reduction by 20% or more in gross receipts for qualifying quarters of 2021 (not the fourth quarter) compared to the corresponding quarter in 2019

For recovery startup businesses, there are other qualifications to claim the ERTC.

Can Tax-Exempt Organizations Claim the ERTC?

Tax-exempt organizations can claim the ERTC if they paid employees qualified wages during the height of the pandemic. Non-profit organizations may qualify under either the shutdown or gross receipts tests to claim the ERTC.

Contact Dayes Law Firm for Help with ERTC Audits

ERTC and IRS guidelines can lead to an audit for some companies or tax-exempt organizations. Visit the IRS Statements and Announcements page for the latest news from the IRS.

For help claiming the ERTC, contact our experienced business tax attorneys at Dayes Law Firm. Call us today at (866) 567-4510 or contact us online to schedule your free consultation with a tax attorney.