As we know, in September, the IRS announced that they would be slowing the process of reviewing new Employee Retention Tax Credit (ERTC) claims in response to a high volume of inaccurate or fraudulent claims clogging up the process.
We discussed we why believed this to be a positive development when the announcement was made. So where does ERTC stand now?
First and foremost, if you have a valid claim, you should still work with a licensed tax professional to prepare your filing.
Second, claims are going to be reviewed again starting in 2024, so the delay is really not making a huge impact. While the program is sunsetting, you have through April 15, 2024, for qualifying 2020 quarters and April 15, 2025, for qualifying 2021 quarters.
Finally, with this announcement the IRS is allowing people to withdraw claims for which the business owner may have concerns about their validity or repay if they have reason to believe their claim may not have been valid - without potential penalty. This further highlights the importance of working with a licensed tax professional to review your claim if it is in process.
A Refresher on Eligibility Criteria for the Employee Retention Tax Credit
In order to be eligible for the Employee Retention Tax Credit, businesses need to fulfill specific criteria. These criteria have been put in place to ensure that the tax credit is given to businesses that have been affected by the COVID-19 pandemic. Here are the main requirements businesses must meet:
- Experienced a significant decline in gross receipts: To be eligible for the tax credit, a business must have experienced a significant decline in gross receipts. This decline is determined by comparing the business's gross receipts in a calendar quarter of 2020 or 2021 with the same quarter in 2019. If the decline is more than 50%, the business may be eligible for the tax credit.
- Partial or full suspension of operations: Another requirement for the tax credit is that the business must have either fully or partially suspended its operations due to government orders limiting commerce, travel, or group meetings. This suspension can be due to the COVID-19 pandemic or related government actions.
- Employee count: The size of the business also plays a role in determining eligibility. For businesses with an average of 500 or fewer full-time employees in 2019, all wages paid to employees during the suspension period or decline in gross receipts are eligible for the tax credit. For businesses with more than 500 employees, only wages paid to employees who were not providing services during the suspension period or decline in gross receipts are eligible.
- Governmental assistance: If a business received a Paycheck Protection Program (PPP) loan, it may still be eligible for the Employee Retention Tax Credit. However, wages that were used to qualify for forgiveness of the PPP loan cannot be included in the tax credit calculation.
If you're a business owner, met the requirements, and worked with a reputable, licensed tax professional, you should be in good shape. However, if you have concerns that your claim might be audited and won't meet the requirements, you should reach out and have someone review your claim ASAP. Unfortunately, there were some bad actors and ERTC Mills that took advantage of small business owners during this difficult time.
What to do if you are being audited?
If you've got a claim in and you are either being audited or have concerns that you might be, here are some things to keep in mind or prepare for.
Importance of Accurate Documentation
It starts with accurate documentation, keep detailed records because it can really boost the credibility of your application and save you from potential audits or issues during the application process.
Properly keeping records allows you to show that your business meets the eligibility criteria and has experienced the necessary decline in gross receipts or suspended operations due to government orders.
- When documenting the decline in gross receipts, it's really important to keep detailed financial records that clearly compare the affected quarters in 2020 or 2021 with the corresponding quarters in 2019. This should include things like sales records, invoices, receipts, and any other relevant financial data.
- For businesses that partially or fully suspended their operations, having accurate documentation will prove how government orders have impacted your business activities. This could include things like copies of official orders, notices, or any other documentation that shows the restrictions imposed on your business due to the COVID-19 pandemic.
- Track employee count and the wages paid during the suspension period or decline in gross receipts. Keep track of your employee records, payroll data, and any other relevant information that supports your eligibility for the tax credit.
By keeping accurate documentation, you not only meet the necessary requirements for the tax credit, but you also have a solid foundation to respond to any potential audit notice. It allows you to confidently present your case and back up your claims, reducing the risk of any discrepancies or issues arising during the audit process.
How to Respond to an Audit
Getting an audit notice for your Employee Retention Tax Credit application can feel overwhelming, but it's important not to panic and instead focus on taking the right steps to handle it effectively.
To help you navigate this situation, here's some information on how to respond to an audit notice:
- Review the Audit Notice: The first step is to carefully read and understand the information provided in the audit notice. It will outline the specific issues or discrepancies that the auditor has identified in your tax credit application.
- Gather Documentation and Evidence: Once you understand the concerns raised in the audit notice, gather all the necessary documents and evidence to support your application. This may include financial records, sales reports, payroll data, and any other relevant documentation that can help validate your eligibility for the tax credit.
- Working with the Auditor: Establish a positive and professional relationship with the auditor. Remember that they are simply doing their job to ensure compliance with the tax credit regulations. Be cooperative, responsive, and transparent in your communication with the auditor.
- Communicating with the Auditor: Be prepared to explain and provide additional information about your application if requested by the auditor. Clearly and concisely address any concerns or questions they may have. This will help build trust and credibility with the auditor.
- Addressing Audit Findings: Take prompt action to address. This may involve correcting errors, providing additional information, or clarifying any misunderstandings. Be proactive in resolving any identified issues to ensure a favorable outcome.
- Evaluating the Audit Findings: Assess the nature and extent of the identified issues to determine the best course of action. This will help you prepare a strong response and minimize any potential negative consequences.
- Correcting Errors and Providing Additional Information: Once you have identified the errors or deficiencies in your application, take the necessary steps to correct them. This may involve submitting revised documentation, providing explanations, or offering any additional information that can address the auditor's concerns. Be diligent in ensuring the accuracy and completeness of your response.
- Appealing an Audit Decision: If you disagree with the audit findings and believe that they are incorrect or unjust, you have the right to appeal the decision. This involves submitting a formal appeal and presenting your case to the appropriate authority. It's important to understand the appeals process and adhere to the specified timelines and requirements.
- Presenting a Strong Appeal: When presenting your appeal, focus on providing a compelling and well-supported argument. Clearly articulate why you believe the audit findings are incorrect and present any additional evidence or documentation that supports your position. Be persuasive, concise, and professional in your appeal to maximize your chances of success.
And finally, don't go it alone
Work with a licensed tax professional to review your claim or support you with your audit. If you have concerns or are being audited, it's advisable to work with a new partner as opposed to whomever you worked with to file the claim.
At C&A, we are working with hundreds of clients to ensure accurate filings and supporting others asking for a perspective on previously filed claims. If you have concerns about your claim, set up some time to talk with our team.