The Employee Retention Credit (ERC) has been available for a while, but only recently have IRS audits of these credits started. It is a good time for a quick outline of what the IRS may ask if your claim is audited because more ERC Mills are appearing and more aggressive tactics are used. If you want to prepare for an employee retention credit audit, contact Tennessee CPAs.
Tips for preparing for an Employee Retention Credit (ERC) Audit
The data below relies on Information Document Requests (IDR) that the IRS has forwarded in connection with ERC submissions that have been chosen for audit.
The IRS wants evidence of the following whether you file using a partial suspension strategy or a gross revenue decline:
- Proof that the company was approved for the ERC when the application was made.
According to the gross receipts approach, these would be quarterly gross revenues demonstrating suitable declines to deserve certification. Below, we will dive into partial suspension qualification in further detail.
- Worksheets that assist in the ERC analysis as stated on the different 941-Xs.
To ensure that the correct credit constraints were applied individually for each employee, this will need to be done by the employee.
- Evidence of any PPP or PPP2 loans, including requests for forgiveness, is required to demonstrate that the salaries utilized for ERC and PPP/PPP2 are distinct.
You should note that the only restriction when comparing ERC and PPP is that you cannot “double dip” and utilize the same salaries to qualify for both.
- General paperwork, such as but not limited to:
- Form W-2 summary and W-3s for the relevant time periods.
- Copies of each shareholder’s personal tax returns for the relevant time periods.
- Copies of the corresponding state unemployment tax returns.
The level of qualifying scrutiny is at a significantly higher threshold when using the partial suspension strategy. In addition to the things mentioned above, the IRS will additionally ask for the following:
- Documentation includes dates to prove that COVID-19-related operations were either entirely or partially discontinued due to governmental instructions.
- Describe the particulars of the aforementioned government order and how they relate to the business’s partial or whole suspension.
The IRS continues to warn about increasingly aggressive techniques that are unlikely to hold up
under audit, even if many audits are still very early. If you are submitting for ERC or have submitted in the past, keeping the information above on hand is prudent in case the IRS conducts an audit.