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What can I expect from an ERC audit?

March 21, 2024 Uncategorized

What Can I Expect From an ERC Audit?

The Employee Retention Credit (ERC) has been a lifeline for many businesses during COVID-19. But with big money comes big attention from the IRS. So if you claimed the credit, you may get a letter saying you’re being audited.
Don’t freak out! An audit sounds scary, but you can get through it if you’re prepared. This article will walk you through what to expect from an ERC audit, so you can chill out and focus on proving your business qualifies.

Why Is the IRS Auditing ERC Claims?

The ERC was supposed to throw cash at businesses to keep workers employed during COVID shutdowns. But not everyone who got money actually qualified.
Some people heard about the ERC and claimed it without reading the fine print. Others straight up committed fraud to get a payout.
So the IRS is double checking every claim to catch errors and cheaters. Some key red flags they look for:

  • Claiming the ERC for employees who weren’t retained
  • Taking the credit during quarters without an eligible revenue decline
  • Claiming wages that don’t match tax filings

If your business set off any red flags, expect a letter from the IRS requesting more info. But don’t freak out yet! Just because you’re being audited doesn’t mean you did anything wrong.

What Will the Audit Letter Say?

The first thing you’ll get is an audit letter saying your ERC claim is under review. It will explain the type of audit and what to expect.
The letter will also include an Information Document Request (IDR). This lists all the documents and info the IRS wants you to provide.
Some common IDR requests include:

  • Payroll records like W-2s and 941s
  • Documentation of revenue declines
  • Proof you paid health insurance premiums
  • Lease agreements and utility bills

Don’t miss the response deadline! The letter gives you a specific time frame to get the IRS everything they requested.

Should I Amend My Return?

If you realize your ERC claim has errors, amending your tax return shows good faith. It won’t cancel the audit, but the IRS may go easier on honest mistakes.
Before amending, weigh the risks:

  • It reopens the statute of limitations, giving the IRS more time to review your whole return.
  • You must pay back any credit you claimed incorrectly, plus interest and penalties.

Only amend if you claimed the ERC incorrectly by a significant amount. For small errors, it’s smarter to work it out during the audit.

What’s the Audit Process?

After you provide the documentation, an IRS agent reviews it to verify your eligibility and credit amount. This involves:

  • Checking you had an eligible decline in gross receipts.
  • Verifying employee wages and health insurance costs.
  • Looking for furloughed employees who shouldn’t have qualified.
  • Recalculating the credit based on eligible wages.

The agent may also request more documents or explanations. Be quick and thorough with responses so you don’t hold up the process.
If the IRS finds errors, they’ll send a formal notice explaining their proposed changes to your credit amount. You’ll have 30 days to dispute their findings before they finalize the audit.

How Long Will the Audit Take?

There’s no set timeline for ERC audits. A simple review of your documents could wrap up in a few weeks. But if issues come up, back and forth correspondence could drag it out for months.
According to IRS data, individual audits take 4-6 months on average. Expect even longer for business returns, especially with a complex credit like the ERC.
Stay patient and cooperative. The more quickly you respond to the IRS, the faster the audit will go.

What Happens After the Audit?

Once the audit finishes, you’ll get a closure letter explaining the IRS’s final determination. There are a few possible outcomes:
No Change
If the IRS verifies your ERC claim was 100% accurate, congratulations! Your credit remains as originally claimed.
Reduced Credit
The IRS may lower your credit if they find errors like ineligible employees or incorrect calculations. You’ll have to repay any excess credit plus interest.
Credit Denied
If the IRS determines you didn’t qualify at all, they’ll revoke the entire credit. You’ll have to pay it all back plus penalties. Ouch!
Larger Credit
Believe it or not, audits can sometimes result in a larger credit! If the IRS agent spots an error in your favor, they may recalculate and increase your payout.

Can I Appeal the Audit Results?

If you disagree with the audit results, you have options to fight them:
Appeal Within the IRS
You can request an Appeals conference to review your case with a new IRS agent. They may see something the original auditor missed.
U.S. Tax Court
For legal disagreements, you can petition the Tax Court to hear your case. They’ll render a new decision that overrides the audit.
Refund Lawsuit
If the IRS denies your refund, you can sue for your money back. But you’ll need a rock-solid case to win in court.
Appeals can drag on for years. And if you lose, you’ll pay even more in interest and penalties! So be absolutely sure you have a legitimate argument before taking it further.

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