Why Are So Many IRS Audits of ERTC Claims Happening?

December 22, 2023
Dayes Law Firm

Congress launched the Employee Retention Tax Credit (ERTC) to help businesses keep their employees on staff during and after the COVID-19 pandemic. While the ERTC has served as a lifeline for employers, it has also served as a lucrative opportunity for unethical scammers. 

After being inundated with incorrect and fraudulent applications, IRS audits of ERTC claims increased. If you are facing an audit or have questions about employee retention tax credits, call the ERTC attorneys at Dayes Law Firm today. In the meantime, here is more about the increase in IRS audits and what it means for your business.

How the IRS Is Responding to ERTC Scams

ERTC scammers tend to use aggressive promotional techniques that trick businesses into applying for the tax credit even if they aren’t eligible. If you improperly claim the ERTC, you may have to return the money, pay interest and penalties, or even face a criminal investigation.

To manage the influx of ERTC claims by both ineligible and eligible employers, the IRS has taken the following actions:

Issuing Fraud Alerts

The agency has announced several warnings about ERTC scams since the program began. These announcements highlight common red flags to help employers avoid illegitimate schemes. 

Temporarily Freezing Processing

The IRS has stopped processing new ERTC claims. While you can still file, the agency will not process your application until after the end of 2023. 

Implementing Stricter Reviews

The agency implemented a more rigorous review procedure, increasing IRS audits of ERTC claims. The reviews are now more intensive and take longer, so you may experience slower processing times.

Allowing New Withdrawals

The IRS also created a way for employers to withdraw potentially problematic claims. This means that if you have filed a claim that you think the agency may consider invalid or fraudulent, you can retract it without paying penalties or interest.

What the Increase in ERTC Claim Audits Means for Businesses

If you have done your due diligence and properly claimed the credit, you may simply need to wait for the IRS to move through its backlog.

On the other hand, if you suspect you fell for an ERTC scam or made a mistake on your claim, the IRS may audit your company’s tax returns. In such cases, you may want to talk to an attorney or accountant about withdrawing or correcting your application.

How to Handle an ERTC Audit

The increased IRS scrutiny of ERTC claims doesn’t mean that the agency will audit every claim. However, it does bump up the chances. If you are facing an audit, consider doing the following:

Contacting a Trusted Professional

If your ERTC claim is audited, contact a licensed accountant or tax attorney before doing anything else. Professional guidance can help you handle the process efficiently, effectively, and with the lowest financial penalties possible. 

Collecting Supporting Documentation

If the IRS questions your eligibility, documentation like the following can help support your case:

  • Proof that your company experienced a full or partial suspension of operations due to a COVID-19 government mandate
  • Evidence of a drop in gross income during the time period you claimed ERTC
  • Accounting records and bank statements
  • Employee pay records and payroll tax documents
  • Tax records from previous years

Planning for Financial Penalties

While IRS audits of ERTC claims may not lead to any extra fees, the agency may levy a 20% penalty if you negligently made an inaccurate filing. If the audit finds the mistake rises to the level of criminal and civil tax fraud, the penalty goes up to 75%.

Dayes Law Firm is here to help, whether you’ve received notice of an IRS audit, need to withdraw an existing claim, or have questions about the ERTC. Contact us at 800-503-2000 for a free consultation.