The IRS has begun to audit ERC refund claims filed for 2020 and 2021. While the audit process is just starting, it is expected to increase over time as the IRS has indicated it is interested in auditing ERC claims.<\/p>\n\n\n\n
It\nis anticipated that the audits will not be limited to specific industries or\ncompany sizes; any business filed for the ERC could come under IRS scrutiny. <\/p>\n\n\n\n
Knowing\nwhether or not you should be concerned begins with identifying any red flags\nthat may exist with your ERC claim. You may even want to get ahead of the issue\nand review your eligibility position now to be prepared should the IRS choose\nto audit your claim.<\/p>\n\n\n\n
Problems in an IRS ERC\naudit <\/strong><\/p>\n\n\n\n If you cannot prove that you had the\nright to claim the ERC on your payroll return, you will have problems in an IRS\nERC audit. To prove that you claimed the credits legitimately, you need to\nprovide the IRS auditor with documents that support your claims, such as the\nfollowing:<\/p>\n\n\n\n Proof of Revenue<\/strong><\/p>\n\n\n\n Businesses could only claim this\ncredit if they significantly reduced revenue or operational restrictions. To\nprove that you qualified based on revenue, you must provide sales statements,\nprofit and loss reports, bank statements, or other documents that show your\nbusiness’s revenue for the quarter the credit was claimed and the comparison\nquarter from 2019. Businesses that claimed the credit in 2021 and were not open\nin 2019 can use 2020 revenue numbers as their baseline.<\/p>\n\n\n\n Operational Restrictions Information<\/strong><\/p>\n\n\n\n If you claimed the credit based on\noperational restrictions, you will need proof of the restrictions. For example,\nif your restaurant could not have dine-in service, you may want to provide\nnewspaper articles about the restrictions’ dates or government notices. <\/p>\n\n\n\n Employee Payroll Documents<\/strong><\/p>\n\n\n\n The ERC is based on the wages you paid\nto qualifying employees. To that end, you may need to provide documents such as\ntime sheets or pay stubs that show how much your employees worked during the\nquarters you claimed the credits. You may also need to show that the employee\npaychecks cleared your bank account.<\/p>\n\n\n\n Number of Employees in 2019<\/strong><\/p>\n\n\n\n If your business had over a certain\nnumber of employees in 2019, you could only claim the credit if you paid\nfurloughed (non-working) employees. If you were under the threshold, you could\nclaim this credit on wages paid to working employees. The threshold was 100\nemployees for the 2020 credits and 500 employees for the 2021 credits.<\/p>\n\n\n\n ERC Worksheets<\/strong><\/p>\n\n\n\n You did not have to include ERC\nworksheets when you filed or amended your payroll returns, but you were\nsupposed to keep these documents for your records. If you do not have the\nworksheets you used to calculate the returns, a tax attorney may help you\nreconstruct these records.<\/p>\n\n\n\n The above are the documents most\nlikely to be requested, but as needed, the auditor may request other documents.\nYou should never hide information from the IRS, but if you’re uncomfortable\nwith an auditor’s request, contact a tax attorney for guidance.<\/p>\n\n\n\n Penalties for Failing ERC Audits<\/strong><\/p>\n\n\n\n If the IRS decides you do not qualify\nfor the ERC credit, the auditor will adjust your returns, and you will owe\ntaxes. Due to the high value of this credit, the tax liability is also likely\nto be high. Additionally, you may face the following penalties:<\/p>\n\n\n\n Late Deposit Penalty<\/strong><\/p>\n\n\n\n The IRS assesses a late deposit\npenalty ranging from 2% to 10% of the taxes owed if you pay your payroll taxes\nlate. If you claimed a credit erroneously, you probably did not make the proper\ndeposits, and thus, the auditor may decide to assess this penalty.<\/p>\n\n\n\n Failure-to-Pay Penalty<\/strong><\/p>\n\n\n\n The auditor may add a failure-to-pay\npenalty to your account. This penalty is 0.5% of the unpaid tax, assessed for\nevery month you are late. It can get up to 25% of your balance. Depending on\nthe situation, the auditor may decide to backdate this penalty based on the\noriginal due date of your payment, or they may only assess this penalty if you\npay the tax liability from the audit late.<\/p>\n\n\n\n Accuracy-Related Penalty<\/strong><\/p>\n\n\n\n This is a penalty that the IRS\nassesses on returns that understated tax liability due to negligence or\ndisregard of the tax code. This penalty is 20% of the understated tax. When you’re\ndealing with credits that are $10,000 per employee per quarter, this penalty\ncan add up quickly if the IRS takes your credits away.<\/p>\n\n\n\n Tax Fraud Penalties<\/strong><\/p>\n\n\n\n In cases of fraud, the IRS can assess\na 75% penalty. In other words, if the auditor disallows a single $10,000 credit,\nthe fraud penalty will be $7,500. This penalty can increase quickly when\ndealing with dozens of employees and significant credits.<\/p>\n\n\n\n When to Get Help With an ERC Audit<\/strong><\/p>\n\n\n\n It is best to deal with an IRS audit\nwith the help of a qualified tax professional. They know the language, understand\nthe requirements, and have experience dealing with auditors. <\/p>\n\n\n\n Here are some signs that you should\ncontact a tax attorney:<\/p>\n\n\n\n The IRS has begun to audit ERC refund claims filed for 2020 and 2021. While the audit process is just starting, it is expected to increase over time as the IRS has indicated it is interested in auditing ERC claims. It is anticipated that the audits will not be limited to specific industries or company […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_daextam_enable_autolinks":"1","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-4609","post","type-post","status-publish","format-standard","hentry","category-planning-for-tax-minimization"],"_links":{"self":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/4609","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/comments?post=4609"}],"version-history":[{"count":1,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/4609\/revisions"}],"predecessor-version":[{"id":4613,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/4609\/revisions\/4613"}],"wp:attachment":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/media?parent=4609"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/categories?post=4609"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/tags?post=4609"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}