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What to Expect if the IRS Audits Your Employee Retention Credit
The Employee Retention Credit (ERC) was a valuable tax credit available to businesses during the COVID-19 pandemic. However, the IRS has recently ramped up its audits of ERC claims, due to concerns about fraud and abuse. If you claimed the ERC, you should be aware of what to expect if the IRS audits your return.
What to expect during an IRS ERC audit:
- Notice: You will receive a notice from the IRS informing you that your return has been selected for audit. This notice will outline the next steps you need to take.
- Information Document Request (IDR): The IRS will request specific documents to support your ERC claim. This may include:
- Worksheets used to calculate the credit
- Proof of a decline in revenue or a suspension of operations
- Information about Paycheck Protection Program (PPP) loans
- Wage expense information on your business income tax return
- Meeting with the auditor: You will likely meet with the auditor over the phone or in person. This is your opportunity to explain your claim and provide any additional documentation. Have a tax professional represent you.
- Determination: The auditor will review your information and make a determination about your return. They may:
- Issue a “no change” report, which means you owe no additional tax.
- Adjust your return, which means you may owe additional tax and penalties.
- Appeal: You can appeal the audit results if you disagree.
Common reasons for ERC audits:
- Claiming the credit on wages that did not qualify
- Failing to reduce the wage expense on your income tax return
- Claiming the credit based on inaccurate information
How to prepare for an ERC audit:
- Gather all documentation related to your ERC claim, such as payroll records, revenue reports, and government orders.
- Review the IRS guidance on the ERC.
- Consult with a tax attorney if you have any questions.
- The IRS has extended the statute of limitations for ERC audits to five years for certain returns.
- The IRS is considering creating a voluntary disclosure program for taxpayers who have made an error on their ERC claim.
- The IRS has an ERC Withdrawal Process for filed but unpaid ERC claims
If you claimed the ERC, it is important to be aware of the possibility of an IRS audit. By following the tips above, you can prepare yourself for the audit process and increase your chances of a successful outcome.
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