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How long does the IRS have to audit the ERC credit?
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How Long Does the IRS Have to Audit the ERC Credit?
The Employee Retention Credit (ERC) has been a lifeline for many businesses during the pandemic. This refundable tax credit was designed to help employers keep employees on payroll and encourage rehiring. However, as with any tax credit, there is always a risk of being audited by the IRS.
So how long does the IRS have to audit ERC claims? The typical statute of limitations is three years from the date the return was filed or its due date, whichever is later. But for ERC claims, the IRS extended this period to five years. This gives them more time to verify claims and watch out for fraud.
Why ERC Claims May Be at Risk
The ERC was rolled out quickly during the pandemic to get aid to employers fast. But this speed led to confusion about eligibility and how to calculate the credit. The complex rules also opened the door to intentional abuse.
Some key problem areas include:
- Claiming the credit without meeting eligibility rules
- Overstating number of employees or wages to inflate the credit
- Claiming employees who were not retained or rehired
The IRS is now cracking down on ERC compliance. They have trained auditors to spot high-risk claims and can assess penalties for reckless or fraudulent cases.
What Triggers an ERC Audit
There are a few red flags that may increase your chances of an ERC audit:
- Amended returns claiming newly discovered ERC
- Large dollar refunds, like over $100,000
- Claiming the credit for state/local government employers
- Businesses in hard-hit sectors like food service, hospitality, and retail
However, the IRS says all ERC claims could potentially be reviewed. Even an honest mistake could trigger questions.
What to Expect During an ERC Audit
If you receive an ERC audit notice, don’t panic. The IRS just wants to verify your eligibility and credit calculation.
According to the IRS, they will examine:
- Whether you met requirements like operations fully/partially suspended or sufficient revenue loss
- The accuracy of the number of employees and wages used to compute the credit
- That retained employees were paid wages during the credit period
- FTE calculations were done correctly
Having thorough documentation will be key to supporting your claims. This includes payroll records, financial statements, and any other evidence related to COVID-19 impact and retention decisions.
Penalties for ERC Noncompliance
If the IRS determines you claimed ERC improperly, you may have to repay the credit plus interest. You could also face penalties:
- 20% penalty for substantial underpayment
- 20% penalty for excessive refund claims
- 75% civil fraud penalty if IRS deems you intentionally misled them
Criminal prosecution is also possible in extreme cases if the IRS thinks you willfully committed fraud.
Tips to Survive an ERC Audit
Getting through an ERC audit starts with staying calm and prepared. Here are some best practices:
- Have an experienced CPA or tax attorney represent you
- Gather all supporting documents and financial records
- Reconstruct calculations if needed to show how you computed the credit
- Highlight facts that confirm you qualified and claimed the ERC in good faith
- If errors occurred, work cooperatively to fix them
With good representation and documentation, you can likely resolve innocent issues with the IRS. But intentional fraud will be dealt with harshly.
The Future of ERC Audits
The IRS has been focused on processing backlogs, but ERC exams are ramping up. The extended five-year audit window gives them plenty of time to verify claims.
Tax experts recommend preparing for ERC audits now by:
- Organizing documentation on eligibility, payroll, and credit computations
- Reviewing original and amended returns for mistakes
- Consulting a tax pro on your audit risks
With billions paid out in ERC, the IRS has strong motivation to recoup any unwarranted refunds. Fines and penalties can be steep for noncompliance. But businesses that claimed the credit properly have little to fear from an audit.