How do I prepare for an ERC audit?
Contents
How to Prepare for an ERC Audit
So, you claimed the Employee Retention Credit (ERC) – and now, you’re worried about an audit from the IRS, right? Well, take a deep breath – because in this guide, we’ll walk through exactly what you need to do, to get ready for one of these audits.But first, let’s start with the basics: what is the ERC, anyway? It‘s a tax credit that was created to help businesses, keep employees on payroll – during the COVID-19 pandemic. Essentially, if your operations were fully or partially suspended, due to a government order – or if you experienced a significant decline in gross receipts, you may have been eligible, to claim a credit, for qualified wages paid to employees.Now, here‘s the thing: the ERC rules were complex, and constantly changing – which led to a lot of confusion, and mistakes on tax returns. So, the IRS decided to crack down, by increasing audits of ERC claims. Their goal? To verify that businesses, were actually eligible for the credit – and that they calculated it correctly.But, don’t panic just yet – because with some preparation, you can sail through an ERC audit, with flying colors. Here’s what you need to do:
Gather Your Documentation
Proper documentation is key, for any IRS audit – but it’s especially crucial, for the ERC. Why? Because the eligibility rules, were so nuanced and fact-specific.So, what kind of documents should you have on hand? Well, here’s a checklist:
- Payroll records, showing wages paid to employees
- Financial statements and tax returns
- Records of any government orders, that impacted your operations
- Documentation of your decline in gross receipts, if applicable
- Calculations showing how you determined, qualified wages
- Any other evidence supporting your ERC claim
Now, I know what you’re thinking: “But Spodek Law Group, I claimed this credit ages ago – how am I supposed to have all that?” Well, here‘s the deal: the IRS can audit ERC claims, for up to 3 years after you filed – or even longer, in some cases. So, if you didn‘t keep meticulous records from the start, now is the time to get organized.Reach out to your payroll provider, your accountant, anyone who may have documentation – related to your ERC claim. Leave no stone unturned, in gathering proof of your eligibility. It may seem tedious, but trust me – having this paperwork in order, could save you thousands in potential penalties, down the line.
Conduct a Self-Audit
Once you have all your ducks in a row, document-wise – it‘s time for a practice run. Yep, I’m talking about a self-audit. Basically, you’ll want to review your ERC claim, with a fine-toothed comb – just like the IRS auditors will.Go through each eligibility requirement, one by one. Were you truly impacted by a government order, in the way required? Did you experience a significant decline in gross receipts, according to the rules? Were the wages you claimed, actually qualified wages under the ERC?As you’re reviewing, make notes of any areas that seem questionable or unclear. These are the things you’ll want to have rock-solid documentation for – or seek professional guidance on interpreting the rules correctly.The self-audit process can be tedious, for sure. But it‘s better to identify potential issues now, rather than being caught off-guard by the IRS auditors. Once you’ve thoroughly vetted your claim, you’ll have a much better sense of how prepared you really are.
Seek Professional Help
Look, I get it – tax laws like the ERC, are incredibly complex. Trying to interpret all the rules and regulations, on your own? It can feel like reading another language, sometimes.That’s why my advice is this: don’t go it alone. Seek out a tax professional, who specializes in ERC audits and compliance. They’ll know exactly what the IRS is looking for, and can review your documentation – to identify any potential red flags, before the audit even begins.Not only that, but having a tax pro in your corner can provide peace of mind, throughout the entire audit process. They‘ll be there to answer questions, provide guidance, and most importantly – advocate for you, if any issues do arise with the IRS.Now, I know what you might be thinking: “But Spodek Law Group, professional help is so expensive!” And sure, hiring an expert doesn‘t come cheap. But honestly? The potential costs of an unsuccessful ERC audit – with penalties, interest, and repayment of the credit – could be way higher.So, don’t try to nickel and dime your way through this. Find a reputable tax firm that specializes in ERC audits, and get them on your team. Consider it an investment in protecting your business – and your hard-earned profits.
Know Your Rights (and Responsibilities)
Okay, so you‘ve got your documentation in order, you‘ve self-audited, and you’ve hired a tax pro to support you. Now what? Well, it‘s time to get familiar with your rights and responsibilities – as a taxpayer facing an IRS audit.First things first: understand that you are not required to simply accept the IRS’s findings. If the auditors conclude that you weren‘t eligible for the ERC – or that you miscalculated the credit amount – you have the right to appeal and dispute their determination.That said, you also have certain responsibilities during an audit. Chiefly, you must respond to any requests for information or documentation, in a timely manner. Ignoring those requests, or being uncooperative? That‘s just going to make the situation worse.My advice? Be proactive in providing information and records to the IRS auditors. But also, don’t be afraid to push back respectfully, if you disagree with their conclusions. With the help of your tax professional, you can make a strong case for why your ERC claim was valid.At the end of the day, an IRS audit is a two-way street. The auditors have a job to do in verifying compliance – but you also have rights as a taxpayer. Knowing those rights, and fulfilling your responsibilities? That’s key to navigating the audit successfully.
Stay Calm and Compliant
Okay, I know – getting that IRS audit notification in the mail, can feel like a punch to the gut. Suddenly, visions of hefty penalties and legal troubles start dancing in your head. But listen up: there’s no need to panic.The most important thing, when facing an ERC audit, is to stay calm and compliant. Don‘t try to hide anything from the IRS, or provide misleading information. Not only is that unethical – it‘s also illegal, and could seriously compound any issues you’re facing.Instead, take a deep breath – and approach the audit with transparency and cooperation. Provide the auditors with all requested documentation promptly, and be upfront about any areas of uncertainty in your claim. Trying to be evasive or deceptive, will only raise more red flags.At the same time, don‘t simply roll over and accept whatever the IRS says, without question. If you genuinely believe your ERC claim was valid, make your case – with the help of your tax professional. Present evidence, cite regulations, and advocate for your position respectfully.The key is striking a balance: be cooperative and compliant, absolutely. But also, don‘t be afraid to defend yourself if you truly were eligible for the credit. With preparation, documentation, and professional guidance – you can navigate this audit calmly and successfully.
Be Prepared for Potential Outcomes
Alright, you‘ve done everything right: gathered documentation, self-audited, hired a pro, cooperated with the IRS. But what if, despite all your efforts, the auditors still conclude that you weren’t fully eligible for the ERC?Well, the potential outcomes can vary – from having to repay some or all of the credit amount, to facing penalties and interest charges. And in particularly egregious cases of fraud or negligence? There could even be criminal consequences.I know, I know – that all sounds pretty scary. But here’s the thing: if you truly made a good-faith effort to comply with the ERC rules, and you have documentation to support your claim, the worst-case scenario is unlikely.More realistically, you may have to repay a portion of the credit, if the IRS determines you miscalculated qualified wages or periods of eligibility. Or, you could face accuracy-related penalties – typically around 20% of the underpayment.The key is being prepared for these potential outcomes from the start. Have a plan for where the funds would come from to repay any credits. Understand the penalty structures, so you can properly account for those costs if needed.And of course, if you disagree with the IRS’s findings? You always have the option to appeal through the administrative process, or potentially even take your case to tax court.The bottom line is this: yes, an unsuccessful ERC audit can be costly. But knowing the potential ramifications ahead of time – and being willing to fight for your claim, if you were truly eligible – can help mitigate the damage.