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How to Prepare for an ERC Audit

Understanding ERC Audits

The Employee Retention Credit (ERC) was a valuable tax incentive, designed to help businesses retain employees during the COVID-19 pandemic, but it also opened the door for potential abuse and errors, so the IRS is now auditing ERC claims extensively. An ERC audit is a formal review by the IRS to verify a company’s eligibility and compliance with ERC rules.

Why ERC Audits Happen

The IRS has several reasons for increasing ERC audit activity:

  • Ensure the substantial funds involved in the ERC program aren’t misused or exploited.
  • Identify errors or fraudulent claims in ERC filings.
  • Promote compliance with tax laws and prevent improper use of government funds.
  • Close the tax gap and collect revenue owed to the government.

The IRS may select businesses for audit based on factors like:

  • Discrepancies between claimed ERC amounts and industry averages.
  • Suspiciously high credit claims warranting investigation.
  • Errors in documentation provided during the ERC claim process.

Types of ERC Audits

If selected for an ERC audit, you’ll receive a notification letter detailing the issues under examination and next steps. There are three main types of ERC audits:

Correspondence Audit

This is conducted primarily through mail, where the IRS requests specific documents related to your ERC claim, which you must provide to substantiate your eligibility and credit calculations.

Desk Audit

In a desk audit, you’ll arrange phone/video meetings with IRS auditors to discuss the documents provided and address any questions or concerns. This allows direct communication with the auditor.

Field Audit

The most extensive type, a field audit involves an IRS auditor physically visiting your business premises to examine financial records, documentation, and overall operations. Field audits for ERC claims are rare and typically reserved for complex cases.

Christine Twomey
Christine Twomey
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Guerline Menard
Guerline Menard
Thanks again Spodek law firm, particularly Esq Claire Banks who stood right there with us up to the finish line. Attached photos taken right outside of the court building and the smile on our faces represented victory, a breath of fresh air and satisfaction. We are very happy that this is over and we can move on with our lives. Thanks Spodek law 🙏🏼🙏🏼🙏🏼🙏🏼🙌🏼❤️
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Believe every single review here about Alex Z!! From our initial consultation, it was evident that Alex possessed a profound understanding of criminal law and a fierce dedication to his clients rights. Throughout the entirety of my case, Alex exhibited unparalleled professionalism and unwavering commitment. What sets Alex apart is not only his legal expertise but also his genuine compassion for his clients. He took the time to thoroughly explain my case, alleviating any concerns I had along the way. His exact words were “I’m not worried about it”. His unwavering support and guidance were invaluable throughout the entire process. I am immensely grateful for Alex's exceptional legal representation and wholeheartedly recommend his services to anyone in need of a skilled criminal defense attorney. Alex Z is not just a lawyer; he is a beacon of hope for those navigating the complexities of the legal system. If you find yourself in need of a dedicated and competent legal advocate, look no further than Alex Z.
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I don’t know where to start, I can write a novel about this firm, but one thing I will say is that having my best interest was their main priority since the beginning of my case which was back in Winter 2019. Miss Claire Banks, one of the best Attorneys in the firm represented me very well and was very professional, respectful, and truthful. Not once did she leave me in the dark, in fact she presented all options and routes that could possibly be considered for my case and she reinsured me that no matter what I decided to do, her and the team will have my back and that’s exactly what happened. Not only will I be liberated from this case, also, I will enjoy my freedom and continue to be a mother to my first born son and will have no restrictions with accomplishing my goals in life. Now that’s what I call victory!! I thank the Lord, My mother, Claire, and the Spodek team for standing by me and fighting with me. Words can’t describe how grateful I am to have the opportunity to work with this team. I’m very satisfied, very pleased with their performance, their hard work, and their diligence. Thank you team!
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I can't recommend Alex Zhik and Spodek Law Firm highly enough for their exceptional legal representation and personal mentorship. From the moment I engaged their services in October 2022, Alex took the time to understand my case thoroughly and provided guidance every step of the way. Alex's dedication to my case went above and beyond my expectations. His expertise, attention to detail, and commitment to achieving the best possible outcome were evident throughout the entire process. He took the time to mentor me, ensuring I understood the legal complexities involved to make informed decisions. Alex is the kind of guy you would want to have a beer with and has made a meaningful impact on me. I also want to acknowledge Todd Spodek, the leader of the firm, who played a crucial role in my case. His leadership and support bolstered the efforts of Alex, and his involvement highlighted the firm's commitment to excellence. Thanks to Alex Zhik and Todd Spodek, I achieved the outcome I desired, and I am incredibly grateful for their professionalism, expertise, and genuine care. If you're in need of legal representation, look no further than this outstanding team.

Preparing for an ERC Audit

Preparation is crucial to navigate an ERC audit smoothly. Here are some essential steps:

Maintain Accurate Records

Keep detailed records of all ERC-related transactions, including employee information, wages, qualified expenses, and supporting evidence. Well-organized records can substantiate your claims during an audit.

Conduct Compliance Checks

Review your ERC calculations, eligibility criteria, and documentation to identify and address any potential issues or errors before an audit.

Seek Professional Guidance

Engage qualified tax professionals or ERC specialists to review your documentation, calculations, and provide guidance throughout the audit process. Their expertise can be invaluable.

Organize Documentation

Systematically organize all supporting documents, such as payroll records, financial statements, tax returns, and ERC calculations, making it easier for auditors to review.

Verify Employee Eligibility

Confirm that your employees met the eligibility criteria for the ERC during the claimed periods.

Stay Updated

Keep up-to-date with the latest ERC guidelines and regulations to ensure compliance with any changes.

During the Audit

During an ERC audit, be cooperative and transparent. Provide explanations and additional documentation as requested by the auditors. Address any queries or concerns raised promptly and professionally.The audit duration may vary depending on the complexity of the case, but be prepared for a potentially prolonged review process.

Potential Penalties

Failure to comply with ERC regulations and reporting requirements can result in severe penalties from the IRS, including:

  • Disallowance of the claimed ERC credit.
  • Assessment of additional taxes, interest, and penalties.
  • Potential criminal charges in cases of fraud or intentional misrepresentation.
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