The U.S. Congress passed multiple bills during the COVID-19 pandemic that provided various forms of relief for businesses and individuals. The Employee Retention Credit (ERC) benefited both by giving businesses an incentive to keep workers on their payrolls during government-mandated shutdowns or significant business slowdowns caused by the pandemic. Unfortunately, many scammers see the ERC as a great way to con businesses out of their money. The IRS placed ERC scams at the top of its “Dirty Dozen” list of tax scams for 2023. It is also placing a priority on scrutinizing ERC claims. This article offers an overview of the ERC and how your business can prepare for an IRS audit into your ERC claim.
The ERC is a refundable tax credit that Congress created in § 2301 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020. Several subsequent laws amended or modified the credit. It was available to businesses that suffered losses during the period from March 13, 2020 to December 31, 2021.
To qualify for the ERC, a business must have continued paying employees during any of the following periods of time:
The ERC is not available to state or local governments, including any political subdivisions. Small businesses that received loan forgiveness through the Paycheck Protection Program (PPP) and not exempt from applying for the ERC but the same payroll costs cannot be used for both programs.
In its “Dirty Dozen” warning about ERC scams, the IRS describes schemes in which promoters make “too good to be true” offers regarding ERC claims. They claim to be able to obtain tax credits for businesses in exchange for a fee (many 15% or more of the ERC credit). They may pocket the fee and leave businesses to the consequences of filing an inaccurate or fraudulent claim.
The last time period for which the credit was available was the fourth quarter of 2021. The number of businesses that remain eligible for the credit can only decrease from this point on. Businesses should approach any offer related to the ERC with great caution.
Any ERC audit carried out by the IRS at this point will be retrospective. The last period of eligibility for the credit was more than one year ago. This can be both a benefit and a burden for businesses facing audits. Since all of the information you need is now historical, you do not have to worry as much about your ongoing operations affecting the information you must provide to the IRS. At the same time, you might need to dig into the archives to gather all of the required information.
The following strategies can help you prepare for an IRS audit of your ERC claims:
The eligibility requirements for the ERC are complex. Certain events have precise definitions. You may have to justify your eligibility if it appears like your situation does not meet the ERC’s standard. The CARES Act defines some important terms, and the IRS has issued guidance providing further details. The following are two of the most important defined terms related to the ERC:
You will need complete and accurate records of your payroll from before and during the period for which you claimed the ERC. This includes a list of all full- and part-time employees during those time periods, along with the dates during which the business employed them.
You will need records showing how your qualified for the ERC. This may include:
The ERC was an immense help to countless businesses in 2020 and 2021. The time to qualify for the credit has now passed, though, so businesses need to be wary of anyone claiming they can help them make a claim. The IRS is keeping a close eye on this issue.
Still need an audit even after the change in participant-counting methodology? We’re here for you! Contact us today to speak with a qualified employee benefit plan professional.
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