Federal Tax Matters
The Employee Retention Credit (ERC) has been a critical lifeline for businesses during challenging economic times due to the COVID-19 pandemic. However, with its complex eligibility criteria and evolving regulatory landscape, businesses face increased scrutiny and potential audits from tax authorities. Azarvand Tax Law provides comprehensive guidance and audit defense for businesses navigating ERC audits.
The basics
The Employee Retention Credit (ERC) is a refundable payroll tax credit introduced as part of the CARES Act in 2020 and has since undergone several legislative changes and expansions. The credit is calculated based on a percentage of qualified wages paid to employees and is designed to help businesses offset payroll costs and retain their workforce. Qualified wages are wages subject to Social Security and Medicare taxes and may also include certain health care expenses paid on behalf of employees.
The amount of qualified wages will depend on a variety of factors, including:
ERC audits
While the ERC offered a lifeline for eligible businesses during the COVID-19 pandemic, those improperly receiving the credit could end up in hot water, having to repay their ERC, alongside substantial interest and penalties. An ERC audit aims to verify that the employer accurately calculated and claimed the ERC. As such, the IRS generally focuses its ERC audits on the following:
Ensuring that the business meets one of the qualifying tests the business had a sufficient revenue decline, the business was, in fact, partially or fully suspended due to a government order, or that the business qualifies as a Recovery Startup Business;
Ensuring PPP was properly offset the ERC calculation;
Ensuring that the majority owner and their relative/spouse wages were properly offset the ERC calculation;
Ensuring that the employer accurately accounted for their full-time employee count as a Small Employer or Large Employer; and
Ensuring that the employer followed the ERC aggregation rules.
Why claims get flagged
The IRS may audit any business’s ERC claims, regardless of employer size, refund amounts, entity type, and so forth. While all businesses are at risk of an ERC audit during the applicable statute of limitations, ERC audits are often triggered by:
Inconsistencies or discrepancies between the claimed ERC amount and submitted substantiation records (e.g., payroll statements, financial statements, tax filings, etc.);
Incorrect or incomplete information reported on tax returns (e.g., Form 941);
Excessive ERC claims that are unsupported (e.g., by number of employees, eligible wages, and other criteria); and
Prior noncompliance with tax laws.
Preparer red flags
If any of the following IRS ERC red flags apply to you, you may have worked with an unscrupulous ERC preparer and should consider undergoing a second look at your ERC filings:
They required you to sign an engagement letter before disclosing the fee and completing an analysis;
They charged you based on a percentage of your refund;
They requested large upfront fees;
They had no tax background before ERC;
They failed to request information related to your PPP loan forgiveness;
They claimed that you are eligible for all quarters of ERC without explanation;
They claimed you are eligible for Q4 2021 ERC, even though you started your business before 2/15/2020 (or your revenue exceeded $1 million if you began your business in 2020);
They wouldn’t sign the tax return, or the return was signed by a firm that you have never heard of;
They failed to ask whether you or your business had ownership interest in other businesses.
Navigating ERC audits
Navigating or preparing for an ERC audit requires a knowledgeable and proactive defense strategy to protect businesses from potential liabilities and maximize available credits. Azarvand Tax Law offers comprehensive support, from eligibility assessment to audit defense and compliance guidance, empowering clients to navigate the complexities of ERC with confidence.
At Azarvand Tax Law, our experienced tax attorneys and CPAs can help you navigate the complexities of ERC audits. Contact us at [email protected] or click here to schedule a free 30-minute consultation and take the first step toward preparing for or defending an ongoing ERC audit. Visit our dedicated ERC audit website, ERCAuditTaxAttorneys.com, to learn more about the ERC audit process.
