Employee Retention Credit (ERC) Audits: A Simplified Guide for Business Owners

The Employee Retention Credit (ERC) was created to help businesses affected by COVID-19. The IRS will be checking these applications closely. They’ve also warned businesses to be careful about false ERC claim offers. If you’ve applied for the ERC, be ready for a potential IRS check in the coming years. Here’s a simplified guide to help you prepare:

1. Organize Your Documents:

  • The IRS provided a checklist in their Notice 2021-20 to help you ensure you’re eligible for the ERC.
  • Gather and organize relevant records. This should include information about:
    • 1. Government rules that affected your business.
    • 2. Revenue records that show a decline in earnings.
    • 3. Details of wages paid to employees.
    • 4. Health plan expenses related to wages.
    • 5. Group decisions affecting the credit.
    • 6. Forms related to the ERC application.
    • 7. How you determined your credit amounts.
  • It’s best to keep documents that were created at the time of your application. This will help others understand your calculations if needed.

2. Keep Records for a Minimum of 6 Years:

  • Depending on which year your claim is from, The IRS has 3 or 5 years to review it.
  • It’s best to hold onto these documents for at least 6 years after you’ve applied. Digital storage is cheap, so consider keeping digital copies forever.

3. Double-Check Your Eligibility:

  • The main reasons businesses could apply for the ERC were due to a COVID-related shutdown or a big drop in earnings.
  • The IRS will check the reasons you’ve listed for applying. Ensure your reasons match up with government records and your revenue reports.

4. Review Wages Paid:

  • Check the wages you paid to each employee and ensure they were eligible for the ERC.
  • Make sure you can explain why you paid these wages to certain employees.

5. Confirm Health Plan Allocations:

  • If you provided health plans for your employees, you could use some of these expenses to determine wages. Ensure your records show this correctly.

6. Ensure Consistency:

  • The IRS will look at all your tax returns to see if your ERC claims are consistent.
  • Make sure your claims align with your quarterly earnings reports.

7. Check Out IRS Resources:

  • The IRS website has many resources to help you ensure your documents are in order.
  • Using these resources will help you make sure you’re prepared for any potential IRS review.

Bottom Line: Keep comprehensive and organized records to show that you applied for the ERC in good faith. With the right documentation, you can confirm your eligibility or avoid penalties if mistakes were made.

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