Preparation For ERC Audits: A Comprehensive Guide For Businesses
In this article, you can discover:
- The pathway the IRS has introduced that your business can use to reverse your ERC claims without penalties.
- What documentation your business should keep for your records in case of an ERC audit.
- At what point during the ERC audit is it crucial for you to obtain legal counsel.
How Do You Assist Businesses In Preparing For An ERC Audit?
Employment Retention Credit (ERC) audits have become prevalent, stemming from the proliferation of so-called “employment retention mills” that emerged a few years ago. These entities aggressively pursued COVID-related credits for businesses, often without thorough due diligence. Consequently, the IRS is now rigorously auditing to ensure companies are legitimately qualified for these credits.
The financial implications can be substantial, potentially involving hundreds of thousands of dollars. Our approach is to meticulously prepare our clients for these audits. This involves a comprehensive review of the criteria for ERC credit eligibility and gathering the necessary documentation to substantiate compliance. In cases where eligibility criteria were not met, we explore alternative strategies to mitigate potential audit repercussions.
What Proactive Measures Can Be Taken To Minimize The Potential Impact Of An ERC Audit On A Company?
Recently, the IRS has offered a remedial option for businesses that erroneously claimed ERC credits. This pathway, introduced just last October, allows companies to reverse their ERC claims without penalties, facilitating repayment over time without interest or other negative consequences.
Proactively, companies should rigorously review their ERC claims. If discrepancies are found, businesses can file a form to reverse these credits and arrange a repayment plan. Additionally, preparing comprehensive documentation in anticipation of an audit is crucial. This preparation helps identify potential audit issues, allowing them to be addressed promptly and effectively.
How Do You Ensure That The Client’s ERC Documentation Is Compliant With IRS Requirements Before And During An Audit?
Ensuring compliance with IRS requirements for ERC claims involves a detailed understanding of the varying criteria for different periods. For instance, the requirements for 2020 differ from those of 2021. Critical aspects include government regulations, comparison of current income to previous years, payroll data, and financial information before, during, and after the COVID period.
Additionally, we examine government orders impacting business operations and employee counts, as the IRS pays close attention to companies with multiple entities. Our goal is to meticulously verify compliance through a thorough documentation review, covering all essential aspects that determine eligibility for each quarter.
How Can Businesses Maintain Accurate And Complete Records To Support ERC Eligibility?
To support ERC eligibility, businesses should meticulously maintain documentation, including records of reduced income, employee numbers for relevant periods, and government orders affecting operations.
Each quarter has distinct requirements, so it’s imperative to retain all documentation submitted during the filing process. This includes spreadsheets or breakdowns used to calculate the ERC and the documents relied upon to confirm both the figures and the qualifications for each quarter.
How Do You Handle Communication With The IRS On Behalf Of Clients Undergoing An ERC Audit? Should A Company Speak Directly To The IRS Without Counsel?
In cases of ERC audits, initial contact with the IRS, typically manageable without legal representation, often resolves simple queries. However, when an audit progresses to the interview stage, professional counsel is strongly advised.
At this juncture, our firm secures a power of attorney to facilitate communication with the IRS. We ensure all necessary documentation is organized and address any identified issues proactively during these discussions.
In What Ways Can Effective Communication Positively Influence The Outcome Of An ERC Audit?
Effective communication is crucial in audits. While auditors are often viewed unfavorably, they are professionals performing their duties. Open, honest interactions with auditors can foster a better understanding of the situation, leading to more favorable outcomes.
Conversely, dishonesty or hostility can be detrimental. Auditors have considerable discretion in their decisions, so maintaining a professional and cooperative relationship can significantly influence the audit’s resolution.
How Do You Ensure That A Client Meets The Employee Retention Criteria Outlined By The IRS During An ERC Audit?
Verifying a client’s compliance during an ERC audit involves an in-depth review of the specific requirements for the relevant year and quarter. This review encompasses an analysis of income reduction, employee numbers, and the impact of government orders.
We also consider less common factors like health insurance and employee relations with the business’s officers. By corroborating these criteria with payroll records, financial statements, and tax returns, we aim to resolve any compliance issues that may arise during the audit.