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Substantiating ERC Eligibility During an Audit

Dealing with an ERC Audit? Here’s How to Substantiate Your Eligibility

What Does the IRS Want to See?

Essentially, the IRS wants to see that you met all the eligibility criteria for the ERC. This includes:

  • Documentation showing you were forced to fully or partially suspend operations due to a COVID-19 government order
  • Records demonstrating a significant decline in gross receipts compared to pre-pandemic levels
  • Payroll data and calculations proving you paid qualified wages to eligible employees
  • Evidence that you didn’t double-dip by using the same wages for other relief programs like the PPP

It’s a lot, we know. But having this documentation organized and ready to go is crucial for a successful audit.

The Key to Substantiation? Meticulous Recordkeeping

Look, the IRS doesn’t mess around with the ERC. They want to see contemporaneous records – meaning documentation you compiled as you went along, not something cobbled together after the fact. So, what kind of records are we talking about? Here are some examples:

  • Copies of the actual government orders that impacted your business
  • Quarterly financial statements showing your gross receipts decline
  • Detailed payroll reports breaking down wages paid to each employee
  • Calculations showing how you determined which wages qualified for the ERC
  • Any internal memos or emails discussing the impact of COVID-19 on your operations

The more documentation you have, the better. It’s all about painting a clear picture of how your business was affected and how you determined your eligibility.

Don’t Rely Solely on Your ERC Provider

Now, we know many businesses used third-party ERC providers to claim the credit. And while those providers may have seemed helpful at the time, the IRS isn’t going to just take their word for it. In fact, some of these providers included language in their contracts stating that the business – not the provider – is ultimately responsible for substantiating eligibility. So, even if you used a provider, you need to have your own documentation and calculations ready to go. Don’t just hand over whatever file they gave you and call it a day.

Be Prepared to Explain Your Specific Situation

Here’s the thing – the ERC eligibility rules were complex and changed over time. What qualified one quarter might not have qualified the next. The IRS knows this, and they’ll want to see that you understood the nuances. For example, let’s say you claimed the ERC based on a supply chain disruption. Well, simply having a supply chain issue wasn’t enough to qualify – you had to show that it forced you to fully or partially suspend operations. Or maybe you’re a large employer who only claimed wages for employees not providing services. Be ready to explain how you determined which employees fell into that category and provide documentation to back it up. The key? Don’t make blanket statements about your eligibility. Be prepared to walk the IRS through your specific circumstances, quarter by quarter if needed.

Consider Getting Professional Help

Look, we get it – dealing with an IRS audit is stressful, especially when large sums of money are on the line. And the ERC rules were complex enough that even seasoned tax pros had trouble wrapping their heads around them. So, if you’re feeling overwhelmed or unsure about how to properly substantiate your claim, consider bringing in professional help. A tax attorney or CPA who specializes in ERC audits can be invaluable. Not only can they help you gather the necessary documentation and calculations, but they can also represent you before the IRS and ensure you don’t inadvertently say or do anything that could jeopardize your case.

Christine Twomey
Christine Twomey
Just had my Divorce case settled 2 months ago after having a horrible experience with another firm. I couldn’t be happier with Claire Banks and Elizabeth Garvey with their outstanding professionalism in doing so with Spodek Law Group. Any time I needed questions answered they were always prompt in doing so with all my uncertainties after 30 yrs of marriage.I feel from the bottom of my heart you will NOT be disappointed with either one. Thanks a million.
Brendan huisman
Brendan huisman
Alex Zhik contacted me almost immediately when I reached out to Spodek for a consultation and was able to effectively communicate the path forward/consequences of my legal issue. I immediately agreed to hire Alex for his services and did not regret my choice. He was able to cover my case in court (with 1 day notice) and not only was he able to push my case down, he carefully negotiated a dismissal of the charge altogether. I highly recommend Spodek, and more specifically, Alex Zhik for all of your legal issues. Thanks guys!
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 🙏🏼🙏🏼🙏🏼🙏🏼🙌🏼❤️
Keisha Parris
Keisha Parris
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.
Taïko Beauty
Taïko Beauty
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!
Anthony Williams
Anthony Williams
Hey, how you guys doing? Good afternoon my name is Anthony Williams I just want to give a great shout out to the team of. Spodek law group. It is such a honor to use them and to use their assistance through this whole case from start to finish. They did everything that they said they was gonna do and if it ever comes down to it, if I ever have to use them again, hands-down they will be the first law office at the top of my list, thank you guys so much. It was a pleasure having you guys by my side so if you guys ever need them, do not hesitate to pick up the phone and give them a call.
Loveth Okpedo
Loveth Okpedo
Very professional, very transparent, over all a great experience
Bee L
Bee L
Amazing experience with Spodek! Very professional lawyers who take your case seriously. They treated me with respect, were always available, and answered any and all questions. They were able to help me very successfully and removed a huge stress. Highly recommend.
divesh patel
divesh patel
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.

Preparation is Key

At the end of the day, successfully substantiating your ERC eligibility during an audit comes down to one thing – preparation.By maintaining meticulous records from the start, understanding the nuances of how you qualified, and being ready to walk the IRS through your specific situation, you’ll be in the best possible position to defend your claim. Sure, it’s a lot of work. But isn’t avoiding potential penalties and interest worth the effort? We think so. So take a deep breath, gather your documentation, and get ready to make your case. With the right preparation and attitude, you can come out on top.

Substantiating ERC Eligibility: A Comprehensive Guide

Dealing with an IRS audit is never fun. But when it comes to the Employee Retention Credit (ERC), the stakes are high – we’re talking potentially hundreds of thousands of dollars on the line. That’s why substantiating your eligibility is so crucial. The IRS won’t just take your word for it that you qualified. They want to see proof, and lots of it.In this comprehensive guide, we’ll walk through exactly what the IRS is looking for and how to gather the documentation you need to back up your claim.

Understanding the ERC Eligibility Requirements

Before we dive into substantiation, let’s quickly review the main ways a business could have qualified for the ERC:

  • A full or partial suspension of operations due to a COVID-19 government order
  • A significant decline in gross receipts compared to pre-pandemic levels
  • Status as a “recovery startup business” for the third and fourth quarters of 2021

Seems simple enough, right? Well, as many businesses learned, there were a lot of nuances and changing rules around what exactly constituted a “suspension of operations” or a “significant decline.”That’s why understanding the specifics of how you qualified is so important. The IRS will want to see that you didn’t just check a box, but that you truly met the criteria.

Documentation the IRS Will Want to See

So what kind of documentation should you have on hand? Here’s a rundown of some of the key items the IRS will likely request:

Copies of Relevant Government Orders
If you qualified due to a suspension of operations, you’ll need copies of the actual government orders that impacted your business. Think stay-at-home orders, capacity restrictions, forced closures, and the like.

Financial Statements and Tax Returns
For businesses that qualified due to a decline in gross receipts, the IRS will want to see financial statements, tax returns, and any other documentation showing your quarterly gross receipts for 2020 and 2021, as well as the comparable quarters in 2019.

Payroll Records
No matter how you qualified, you’ll need detailed payroll reports breaking down the wages paid to each employee during the eligible periods. The IRS will use these to verify that you only claimed qualified wages.

Calculations and Workpapers
Be prepared to show your work. The IRS will want to see the calculations and workpapers you used to determine your eligibility, the specific wages that qualified, and the ultimate credit amount.

Employee Work Records
For large employers who only claimed wages for employees not providing services, you’ll need documentation like time sheets, job descriptions, and work logs to substantiate which employees fell into that category.

Internal Communications
Any internal memos, emails, or other communications discussing the impact of COVID-19 on your operations or the decision to claim the ERC can help bolster your case. The key here is contemporaneous documentation – meaning records you compiled as you went along, not something put together after the fact. The IRS will be skeptical of anything that seems like it was created just for the audit.

Dealing with Third-Party Providers

Many businesses used third-party ERC providers to claim the credit. And while those providers may have seemed helpful at the time, they could actually complicate things during an audit. For one, the IRS isn’t going to simply accept the provider’s analysis or documentation as gospel. They’ll want to see that you, as the business owner, understood the eligibility requirements and how you qualified. Even more concerning? Some of these providers included language in their contracts stating that the business – not the provider – is ultimately responsible for substantiating eligibility. So if you used a third-party provider, don’t just hand over whatever file they gave you. You need to have your own documentation and calculations ready to go. It’s also a good idea to review any advice or analysis the provider gave you with a critical eye. There were a lot of aggressive and even outright incorrect positions taken by some bad actors in the ERC space.

Bringing in Professional Help

Let’s be real – dealing with an IRS audit is stressful enough. Throw in the complexities of the ERC rules and the potential for massive dollar amounts to be at stake, and it can feel downright overwhelming. That’s why many businesses choose to bring in professional help in the form of a tax attorney or CPA who specializes in ERC audits and substantiation.These professionals can be invaluable in a few key ways:

  • Reviewing your documentation and calculations to identify any potential weaknesses or missing items
  • Helping you gather additional substantiation materials
  • Representing you before the IRS and handling all communications
  • Ensuring you don’t inadvertently say or do anything that could jeopardize your case
  • Negotiating with the IRS if they take issue with part of your claim
  • Appealing any unfavorable decisions

While hiring professional representation does come at a cost, it can be well worth the investment when you consider the potential penalties, interest, and headaches you could face by going it alone.

A Note on Amending Tax Returns

One often-overlooked aspect of substantiating your ERC claim is the need to amend your income tax returns for any years you claimed the credit. See, there’s a rule that says you can’t claim the ERC and also deduct those same wages as an ordinary business expense. So if you did that, you’ll need to file amended returns to remove the wage deductions. Failing to do so could not only jeopardize your ERC claim but also open you up to additional taxes, penalties, and interest down the line. Your tax professional can assist with preparing and filing these amended returns as part of the substantiation process.

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