20 Sep 23

Will ERTC be audited?

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Last Updated on: 20th September 2023, 02:47 am

Will ERTC be Audited?

The Employee Retention Tax Credit (ERTC) has been a lifeline for many businesses during the pandemic. This tax credit has provided much-needed financial relief, allowing companies to keep employees on payroll. However, as with any government program, there are always some who try to take advantage and claim more than they are entitled to. This has led to increasing scrutiny from the IRS about potential ERTC fraud, leaving many business owners wondering – will ERTC be audited?

In this article, we’ll break down what we know so far about potential ERTC audits, what red flags may trigger an audit, and steps you can take to protect yourself if you’ve claimed the credit. Let’s dive in!

IRS Crackdown on Potential ERTC Fraud

The IRS has been vocal about their concerns over potential abuse of the ERTC program. In September 2022, the agency ordered an immediate halt to new ERTC claims processing, citing a “surge of questionable claims” [5]. They stated that hundreds of criminal investigations were already underway related to fraudulent ERTC claims.

The IRS also called out aggressive promotion of the ERTC by some tax preparers as misleading businesses into improperly claiming the credit [1]. Clearly, the IRS is serious about auditing potentially fraudulent ERTC claims.

ERTC Audit Red Flags

So what types of ERTC claims are likely to get flagged for an audit? Here are some red flags to watch out for:

  • Claiming the credit despite not meeting eligibility requirements
  • Taking the credit for employees who weren’t actually retained or paid
  • Claiming significantly more employees than you really have
  • Claiming the credit multiple times for the same employee
  • Claiming the credit for bonuses or hazard pay
  • Having a dramatic increase in employees from 2019 to 2020 with no explanation

Essentially, anything that seems like an attempt to claim more than your business is truly entitled to could get flagged. The IRS has access to payroll records and will be scrutinizing claims that don’t match up.

What to Expect in an ERTC Audit

If your business does get selected for an ERTC audit, here’s a quick overview of what to expect:

  • You’ll receive a notice from the IRS indicating you’re being audited
  • The IRS will request documentation like payroll records, 941 forms, and proof of qualified wages paid
  • An IRS agent will thoroughly review your records and may ask detailed questions about your eligibility and calculations
  • If the IRS determines you claimed too much, they’ll send a bill for repayment plus interest and penalties

The process can feel intimidating, like being “cross-examined over minor mistakes” as one taxpayer described it [4]. However, having your documentation in order can help ease the stress.

How to Prepare Your Business for a Potential ERTC Audit

Even if you’re confident your ERTC claim was 100% legitimate, it’s wise to take proactive steps to prepare for the possibility of an audit. Here are some tips:

  • Maintain clear records of all wages paid and employees retained during the pandemic. This includes payroll reports, 941 forms, W-2s, and timecards.
  • Document your eligibility determination, including evidence that operations were fully or partially suspended or gross receipts declined.
  • Keep records of any advice received from tax professionals, attorneys, or the IRS itself that supported your eligibility.
  • Have a written explanation of how you calculated the credit amount if it wasn’t straightforward.
  • Gather any other evidence that shows you made a good faith effort to comply with program rules.

Thorough record-keeping and documentation will be your best defense if audited. The IRS will be more lenient if it’s clear you made an honest mistake rather than intentionally misrepresenting your eligibility.

Correcting Honest ERTC Errors

What if you review your records and realize you did accidentally claim more than you should have? Don’t panic. Here are your options:

  • File an amended return correcting the error. You’ll have to repay any excess credit plus interest, but penalties may be waived if you come forward voluntarily.
  • Wait to see if you’re audited and address it then. However, penalties will likely be higher if the IRS catches the mistake first.
  • Consult a tax professional for guidance on the best approach for your situation.

The important thing is to not ignore honest mistakes – address them proactively and you’ll fare much better if audited down the road.

Avoiding Shady ERTC Help

With all the complex rules around ERTC eligibility and calculations, many businesses turned to tax preparers, accountants, and consultants for help claiming the credit. Unfortunately, there are always some unscrupulous actors looking to profit from confusion over government programs.