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Beware Expected Employee Retention Credit (ERC) Audits
The IRS recently issued its seventh warning against questionable ERC activity. The IRS, with its new funding, is expected to ramp up its Employee Retention Credit (ERC) audit enforcement.
The IRS ERC audit process is complex and can be daunting for businesses that are not familiar with it. The IRS will first send you a notice of audit, which will outline the scope of the audit and the specific issues that the IRS is concerned about. You will then have an opportunity to gather documentation and prepare for the audit.
The IRS auditor (Revenue Agent) will typically ask you to provide documentation to support your ERC claims. This documentation may include payroll records, employee W-2 forms, and proof of the economic hardship that caused you to reduce your workforce. The auditor may also ask you questions about your business and your ERC claims. It is important to be prepared to answer these questions in a clear and concise manner.
If you are not comfortable dealing with the IRS on your own, you can hire a tax professional to represent you. A tax professional can help you gather the necessary documentation, prepare for the audit, and negotiate with the IRS on your behalf.
Here are some of the specific issues that the IRS may look at during an ERC audit:
- Whether you were eligible for the ERC. To be eligible for the ERC, you must have met certain requirements, such as having a qualifying business and having reduced your workforce due to economic hardship.
- Whether you properly calculated the ERC. The ERC is calculated based on the number of qualified wages you paid to eligible employees. The IRS will verify that you calculated the ERC correctly.
- Whether you properly claimed the ERC. The ERC can be claimed on your federal income tax return or on an amended return. The IRS will verify that you claimed the ERC correctly.
If the IRS finds that you did not qualify for the ERC or that you did not properly calculate or claim the ERC, you may be liable for additional taxes, penalties, and interest.
Beware of Fraud Penalties
The ERC fraud penalty is a penalty that can be imposed by the IRS if a taxpayer is found to have fraudulently claimed the Employee Retention Credit. The ERC fraud penalty is a civil penalty, which means that it is not a criminal charge. However, the penalty can be significant. The IRS can impose a penalty of up to 75% of the amount of the ERC that was fraudulently claimed.
In addition to the ERC fraud penalty, the IRS may also impose other penalties, such as accuracy-related penalties and interest. Accuracy-related penalties are imposed if a taxpayer makes an unintentional mistake on their tax return. Interest is charged on any amount of tax that is owed to the IRS. If a taxpayer is found to have fraudulently claimed the ERC, they may also be subject to criminal prosecution. Criminal prosecution can result in fines, imprisonment, or both.
Here are some possible examples of ERC fraud:
- Claiming the ERC for employees who were not actually employed by the taxpayer.
- Claiming the ERC for wages that were not actually paid to employees.
- Claiming the ERC for employees who were not working during the covered period.
- Claiming the ERC for employees who were not eligible for the credit.
If you are considering claiming the ERC, it is important to make sure that you are eligible for the credit and that you are claiming the credit correctly. You should also keep good records of all of your payroll records and other documentation that supports your claim.
Here are some additional tips for defending yourself against an IRS ERC audit:
- Be prepared. The IRS will likely ask for documentation to support your ERC claims. Make sure you have all of the necessary paperwork, such as payroll records, employee W-2 forms, and proof of the economic hardship that caused you to reduce your workforce.
- Be cooperative. The IRS auditor is just doing their job. Be polite and helpful, and answer all of their questions to the best of your ability.
- Keep good records. This is essential for any business, but it is especially important if you are claiming the ERC. Make sure you keep track of all of your payroll records, including employee names, Social Security numbers, dates of employment, and wages paid. You should also keep track of any documentation that supports your claim of economic hardship, such as sales reports, profit and loss statements.
- Be proactive. If you receive a notice from the IRS that you are being audited, do not ignore it. Contact the IRS as soon as possible. The sooner you get started, the better.
- Be honest. The IRS is more likely to be lenient if you are honest and cooperative. If you made a mistake, do not try to hide it. The IRS will eventually find out, and you will only make things worse for yourself.
- Get help from a tax professional. If you are not comfortable dealing with the IRS on your own, you can hire a tax professional to represent you. A tax professional can help you gather the necessary documentation, prepare for the audit, and negotiate with the IRS on your behalf.
Patel Law Offices offers a free strategy session to discuss how to resolve your legal problem. Conveniently schedule online today with our online scheduler and questionnaire.