ERC Audit

The Employee Retention Tax Credit (ERC) was passed on March 27, 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). When the legislation was passed, few people had heard of the credit. However, over the last year, business owners have been bombarded by advertisements from companies they have never heard of before offering to help them claim their credit.

Many of these companies hold themselves out as “experts” in obtaining the credit. They make wild claims, tout their expertise, and make promises to defend their customers in an audit. With promises of hundreds of thousands or even millions of dollars in refunds, many business owners and non-profit organizations have turned a blind eye to the dangers that these companies present.

ERC Fraud has already cost the federal government more than one hundred billion dollars. As such, The IRS has been ramping up swiftly to take strong action against these companies and the taxpayers who have improperly claimed the credit.

The IRS has already issued multiple warnings to the public not to use these services. In March 2023, the IRS wrote, “The IRS and tax professionals continue to see third parties aggressively promoting these ERC schemes on radio and online. These promoters charge large upfront fees or a fee that is contingent on the amount of the refund….The IRS is actively auditing and conducting criminal investigations related to these false claims. People need to think twice before claiming this.”

Furthermore, the IRS has made itself very clear, stating, “Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.”

Once misleading/false ERC credit claims made the IRS Dirty Dozen List, tax attorneys started ramping up to defend taxpayers against the IRS. The Dirty Dozen List, is the IRS’s annual published list of tax scams that the government considers to be the “worst of the worst.” Indeed, the IRS has responded by using its internal resources to create audit groups that are specially trained to audit ERC claims. We spoke with one auditor recently, who confirmed her job was to audit as many taxpayers as possible.

ASK YOURSELF THESE QUESTIONS TO SEE IF YOU MAY BE AT RISK FOR AN ERC AUDIT

• Did you use an ERC company or outside service to claim your credit that was not a tax law firm or a CPA Firm? Did you find out about this company through advertising? Did this organization charge you a contingent fee, i.e. based on the credit amount, to help you file the credit?
• Did your ERC Company identify itself by saying it was “one of the largest ERC processors” or tout large numbers of businesses that they have helped?
• If you asked for backup to support the calculations for the credit on your amended payroll tax returns, were you provided with a spreadsheet or something that looks like a spreadsheet?
• Did you claim the Credit in Q2 and Q3 2021 and are you in a Republican state and/or in a rural area?
• Do you have a government order that you can readily cite to that caused specific detriment to your business?
• Did your revenue increase during the pandemic or would you consider the impact of government orders to your business to be less than nominal?
• Is the basis for your Credit a “supply chain” argument?
• Were you ever asked to provide documentation to the company that prepared your ERC? If asked, could you readily provide documentation to substantiate both the government orders that impacted you and that impact?