Some English language terms can increase your level of anxiety just by hearing them out loud. When it comes to the IRS, “audit” is one of those terms that seems like it should have some ominous, bloated organ music behind it. But there are ways to alleviate that stress and worry when it comes to applying for employee retention credit from your clients.
As expected, businesses across the country are receiving notices from the IRS, known as a Disclosure Document Request, requesting additional information about their ERC applications. Whether a company is selected randomly or for a specific reason, the first thing to remember is that receipt of such a notice is absolutely no indication that anything is wrong with the ERC filing.
This means that, like all filings with federal agencies, operations are in place to test processes and ensure that tax filings across the country have been properly executed. Ensuring your customers are protected and compliant throughout the audit process is critical.
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What is the IRS looking for? Based on everything we have seen so far, eligibility is its primary focus, i.e. whether taxpayers and claimants have correctly calculated the amount of tax paid, their eligible employees and their situation, and the impact of the pandemic on their business.
Another no less important item examined is whether taxpayers and plaintiffs have filed amended returns to pay taxes on ERC funds. The first step is to create a file with all the supporting documents to justify the ERC filing. Don’t wait for the IRS to contact your clients – confirm and document all the details of their ERC requests. This includes all of your gross receipts, if they fall under the revenue reduction qualifier, or outage impact records if the client used another method. Remember that customers must keep all of these documents on file for at least four years after the date the tax is due or paid, whichever is later.
The initial applications we see ask for details confirming the eligibility calculation. The IRS may request some or all of the following information:
- Lists of employees and owners.
- Payroll journals.
- Any related party with an interest in the business.
- Tax forms already filed.
- Notice of suspension of operations during the eligibility period.
- Gross receipts for 2019, 2020 and 2021 Paycheck Protection Program application and loan forgiveness information.
Some of the information requested can be quite detailed. The IRS may ask to see the breakdown of salaries between ERC and PPP funds. You may be required to provide spreadsheets breaking down annual gross receipts for 2019, 2020 and 2021.
Without someone who has particular expertise in these areas, there are many places where a company might even unknowingly miss the information required for their filing.
Things to think about
Aggregation rules: These rules are very complex and eligibility requirements have changed over time, so it can be difficult to understand the requirements and apply the rules to each specific situation.
List of full-time employees: It is important to remember that understanding the number of full-time employees is different for the ERC process and for other IRS credits. For the ERC, it is based on the average number of full-time employees in 2019 who worked 30 hours per week or 130 hours per month in each calendar month of the year. The preparer will then calculate an average of this number to arrive at the number of employees.
Claiming an ERC credit follows the same rules as claiming a tax deduction on a tax return. That is, the information filed is certified to be accurate and true under penalty of perjury. Companies claiming the ERC must confirm every aspect of the analysis in the claim.
The ERC is a valuable refundable tax credit that can make a real difference to business owners’ finances. Accurate records of the impacts of Covid-19 restrictions will help your clients feel confident about their ERC eligibility. As a trusted expert, you may want to work with an ERC specialist who stays current with all established and evolving IRS requirements.
Whether you are filing for your clients yourself or with a partner, now is the time to take action and prepare backup information for your clients’ ERC filings to reduce the fear of possible audit and know that all the files are in order.
This article does not necessarily reflect the views of Bloomberg Industry Group, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Sunshine J. Chapman is President and Founder of ERC Provider, a niche consulting firm dedicated to helping companies navigate the details and realize the benefits of the ERC program.
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