How To Prepare For An IRS ERC Audit (Employee Retention Credit Audit)
The IRS has warned that it will begin auditing businesses that received the Employee Retention Credit (ERC). Due to the rise in fraudulent ERC applications, the IRS Commissioner has said that the ERC audit efforts will be more aggressive than usual. In this video we talk about how you should prepare for an IRS ERC Audit.
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Hello from Freedom Group. In this video, we’re going to talk about how you should prepare for an IRS ERC audit. Now, why should you prepare for an IRS audit if you received the employee retention credit? It’s because the IRS knows that there has been a lot of fraud. A lot of companies are making massive marketing efforts telling a lot of business owners that they are eligible for this IRS credit when they’re not. The IRS knows this and the IRS has openly said that they’re going to start auditing these credits as soon as right now. To talk about this topic, I’m going to bring in my coworker, Carmen, Hello, Carmen. How are you?
Hi, Carlos. I’m doing well and you?
Good. Carmen is our ERC expert here at Freedom Tax Accounting. She’s been doing ERC work now for, I guess, like three years now.
Since it came out 2020. Wow.
Zorrego. I would say that Carmen is an authority in the topic. Carmen, the IRS has openly said that they’re going to start auditing these credits, right?
That’s correct. Yes, this credit has been very successful. A lot of legitimate claims have been submitted to the IRS. But like you mentioned, there has been a lot of pressure, a lot of aggressive marketing by some providers. Some people have fallen into the trap of going ahead and claiming this and not really doing their homework and making sure that they do qualify. The IRS is on heightened alert.
Okay. That’s the reason the IRS is auditing these credits more than others? Because they know there has been a lot of fraud? Or is there another reason?
I think that even before that these… We have seen this aggressive marketing by a lot of companies, and even the IRS has issued notices and newsletters warning about these providers. But even before that, let’s think back to when PPP, all the COVID assistance came out. The goal was to get money into people’s hands as soon as possible. The amount of claims that have been submitted, it’s just too high for them to stop and really evaluate each case to see if they really do deserve it. They’re just going to issue it based on the calculation and send it to the people. Eventually, they were going to go back and audit anyway. This is something that we were anticipating. However, because of the influx of these dubious claims and this aggressive marketing scheme by so many providers, that’s just sped up the process of their intention to audit these.
Okay. If I’m a business owner and I applied for the ERC credit or if I already got the ERC credit funds, should I be worried of getting an IRS audit?
Okay. I don’t think you should be worried necessarily if you know and you were diligent and you took care of asking for this credit if you were truly eligible for it. There’s no need to worry if you truly were eligible because it’s easy to prove your eligibility. If you, in fact, are, you would be worried if you’re not sure or if you know that it was done wrong. Then that’s where I personally would worry.
How can a business owner prove that they were actually eligible for this credit?
Based on the law, there were two basic ways that you can qualify. There was a few additional ones, but the two main ones were if a company of a business was subject to executive orders that closed their operations or limited it. It could have been a full or a partial shutdown. That’s pretty easy to prove by getting the PDFs of the executive orders in your area. You have to just link them back to back and make sure that the dates cover the time that you requested and the time period that you observed the wages and calculated the credit based upon. That’s pretty easy. Then in the other case, it would be of revenue reduction. If a company had a reduction in their revenues, when you look at 2020 versus 2019, you had to have had a 50% or more reduction in any given quarter compared to that same quarter in ’19. You had to have had a 50% or greater reduction in 2020. In 2021, first through third quarter, you had to have had a 20% reduction compared to 2019. The way that you would prove this is by having your profit and losses by quarter ready to go.
You should already have them if that’s what you utilize to get the credit, but you should definitely have them saved and in a folder to have easy access in case you ask for them. Those are the two easiest ways to prove that you qualify.
If I got the credit or I applied for it, one of the ways I can get ready for the audit is to make sure that you have copies of all your financial statements of your company, and especially by quarter.
By quarter, that’s the key. Because they’re not going to look at your eligibility based on the whole year. It’s based on the quarters as stated in the law.
Specifically, the profit and loss by quarter.
Profit and loss by quarter.
For 19, 20, and 21.
And 21, basically.
2021 goes through the third quarter, so all the way through September 30 of 2021.
Now we prove that they’re eligible. Now, what documents they can be stored to prove the amount that I put in qualified wages to get the credit?
Okay, so for the qualified wages, that gets a little trickier because there you have to make sure that somehow, I tend to use Excel. It’s easy to list all of the employees. There you have to make sure that you show how you calculated what wages you were going to use, being careful to avoid any funds that were used in the PPP forgiveness or funds that were during your covered period, but that were above and beyond the amount that you got for PPP or the amount you use for forgiveness. There’s that portion that has to be specified. Then there’s also the wages for the owners, the majority owners and their families, because no family members, spouse, siblings, kids, grandkids, aunts, uncles, anybody who is related cannot be… Their wages cannot be utilized to calculate the credit. You have to have a way, whichever way you did it, to specify these wages. I was able to use full out, and these were limited to whatever exceeded the PVP or these are the wages I took out because they were owner wages. That has to just be specified clearly. There’s no right or wrong way the IRS doesn’t specify.
You have to have it in any specific format, but you have to make sure that you can show that.
Okay. Other than having your profit and loss by quarter from 2019, 2020, 2021, you should also have specifically your payroll documents.
Payroll documents that you utilized, payroll summaries, payroll detail, depending on the payroll provider, it’s called different things. But the PPP forgiveness loans.
The application. The PPP loan documents, especially when you got it.
And your forgiveness. Especially when you got forgiveness.
Yes, because we have to see the covered period that was utilized for PPP forgiveness because that has to reflect on how you calculated it, how you calculated the ERTC. We have to be able to see on the application for the forgiveness, your covered period that you used. We want to be able to see how you broke down the forgiveness because for PPP forgiveness, you were able to use at least 60% on wages. If you did, in fact, just use 60%, then you have even more available to use for ERTC. It’s very important to see the breakdown of how you presented that PPP forgiveness.
Okay, good. If I’m a business owner and I contracted one of these companies to do my ERC credit application, I may have not received the funds yet, or I may have already received the funds, how can I make sure that the work they did for me, that these companies actually applied for the ERC correctly? Is there a way I can find out?
Sure. It’s like getting a second opinion from a doctor, right? Okay. You received a result and you want to see what somebody else, a professional has to say about it, right? You could absolutely give us a call at 407-344-1012, and we can take a look at your case and see how it was calculated. You would have to provide us all the documentation that was given to you in the calculation of this credit. We see how it was calculated to see if they went about the correct way or not or what it should have been.
Okay. That way, basically, we review what was sent on your company’s behalf. Because at the end of the day, even if you paid a company, the IRS holds you responsible as the business owner. I can’t just turn around and tell the IRS, It’s not my fault. I paid another company to do this for me. The IRS is going to say, Yes, but it’s your signature and it’s your responsibility. Right.
To add to that, Carlos, some of these companies, if you look at the 941Xes, they didn’t put their information. The only signature on there is the business owner. The business owner. That’s even more touchy. The limelight is completely on the taxpayer or the business owner.
Just to make sure if you’re not sure if your ERC was done correctly, then we have a service where we can review the application that was sent on your behalf, okay? We will tell you if it was done correctly or not. Now, what happens if we review a case and it turns out that either they weren’t even eligible for the credit and they got it, or they got more than they were supposed to. What can business owners do at that point?
Well, that’s based on a case-by-case situation. We’re going to analyze the case and see what happened. But in the most conservative, the most proactive of approaches, if you know the exact amount that you were overpaid, then it would be a good idea to at least mentally prepare for it and set that money aside. Hopefully, it wasn’t completely spent. If it did, try to make some efforts to at least recoup some of it so that in good faith we could approach the IRS, let them know, Hey, sure, I signed the 941, but I was not aware that this was done incorrectly. Here’s my proactive approach to try to rectify the situation and minimize whatever penalties or interest. Because to put it bluntly, whatever you were overpaid, you’re going to have to pay back with penalties and interest. The lesser the amount that is hanging out over and above what you should have received, the better, because then the penalties and interest are less.
Okay. Now you know, if you apply for an ERC credit, you’ve already received it, and you’re not sure if it was done correctly or not because of all the scams that were going around, you can call us and Carmen can review your case and she can tell you exactly if it was done correctly, if you got overpaid, or if it was done correctly, then you have peace of mind that if the IRS does audit you, you’re going to be okay. Carmen, if people want to start this ERC review process, what should they do?
Just give us a call. Give us a call at 407-344-1012. We’ll schedule a quick consultation. Maybe if I’m available right at that moment, we could have a 15-minute free consultation. Depending on what I find out in that conversation, I may encourage you to schedule an appointment. We could either meet in person, we could do a Zoom call, and we could get further into it. It’s on a case-by-case basis. Depending on your specific needs, we’ll proceed in that manner. Perfect. Try to help you out as best as possible.
Very good. Now you know. Now you can get your ERC reviewed and start preparing for… If you got an ERC, start getting your documentation. Start getting your profit and loss, your payroll reports, your PPP documents because you’re going to need them in case of an IRS audit for ERC. Thank you for watching this video. I hope you have received valuable information. If you have, like it and share it with another business owner. Thank you for watching.
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