Will The IRS Audit ERC Claims?

The Employee Retention Tax Credit is putting money back into the pockets of small business owners, but it is also bringing a new worry for employers: the risk of an ERC audit by the IRS.

While an ERC audit is possible, taxpayers that did the math and properly filed their returns likely have nothing to fear. In this post, we’re going to break down employee retention credit audits, including who’s getting audited, why you may get audited, and what to do if you receive a letter from the IRS.

Keep reading to learn more about ERC tax audits.

What Is The ERC? The Short Answer

The Employee Retention Tax Credit, or ERC for short, is a refundable employment tax credit available to eligible small business owners that were affected by the COVID-19 pandemic. With this credit, taxpayers are able to claim wages paid to qualified employees in 2020 and 2021.

Small business owners that didn’t take advantage of the ERC in 2020 and 2021 are able to retroactively claim the credit by filing amended quarterly tax returns. They will receive the credit in the form of a refund check from the IRS.

If you want to learn more about the ERC, check out our complete guide to understanding and receiving the Employee Retention Tax Credit.

Is The IRS Auditing ERC Claims?

The IRS is auditing ERC claims, whether they were claimed with the employer’s original quarterly tax return or claimed retroactively with an amended return. As of late 2022, some companies had already reported being audited for claiming the ERC.

As with other tax audits, the IRS is auditing ERC claims to verify the accuracy of claims and detect fraud. While the IRS hasn’t specifically noted what the organization will be looking for during its ERC audits, we can look at typical IRS tax audits to have a better understanding of what the IRS will be verifying. This includes:

• Eligibility: Was the taxpayer eligible to receive the ERC credit? Did the taxpayer meet all requirements, including having their business fully or partially shut down by the government or a decline in gross receipts? These may be some things that the IRS looks for while performing an ERC audit.
• Accuracy Of Amounts Claimed: The IRS will likely make sure that the taxpayer claimed the correct number of employees and an accurate amount for each.
• Other Errors: The IRS may also look for additional errors made by the taxpayer, such as claiming relatives as qualified employees or receiving credits for wages paid for using Paycheck Protection Program funds.

How Long Does The IRS Have To Audit ERC Claims?

The IRS typically has three years from the date a return is filed in order to audit the return and assess additional taxes or penalties. This mostly holds true for returns filed with the ERC, with the exception of quarterly returns filed in Q3 and Q4 of 2021. These returns have a five-year statute of limitations.

It’s also important to note that there is no statute of limitations on the IRS investigating a false or fraudulent return filed in an attempt to evade taxes.

Will I Be Audited By The IRS For Claiming The ERC Credit?

Any time you submit a tax return to the IRS, there’s a possibility that your return will be audited. Returns with claims for the ERC are no exception.

Whether or not the IRS is giving increased scrutiny to returns with ERC claims is unknown at this time. However, the IRS has already started auditing ERC claims, and it’s likely that ERC claims — particularly very high credit amounts — may be more likely to trigger a tax audit by the IRS.

What Do I Do If My ERC Refund Is Audited By The IRS?

If your ERC refund is audited by the IRS, the first thing to remember is not to panic.

Getting audited by the IRS doesn’t mean you’ve done anything wrong. You’ll need to provide additional information and documentation to verify that you were eligible to receive the ERC and claimed the proper amount.

Here’s what you need to know if you are audited by the IRS for claiming the ERC.

Communicate With The IRS

An IRS audit can be scary, but the worst thing you can do is avoid communicating with the IRS in hopes that the problem will go away. Spoiler alert: it won’t. Instead of avoiding the issue, tackle it head-on. Send documentation and communications by the requested dates, and don’t hesitate to reach out to the IRS by phone or email if you have any questions or concerns.

Submit Documentation Requested By The IRS

As part of an audit, you will need to gather documentation that backs up your tax return. You will receive an Information Document Request (IDR) that outlines the documentation you need to submit to the IRS. This may include:

• Documentation to prove that your business was fully or partially shut down as the result of a government mandate
• Documentation to show a decline in gross receipts during the period you claimed ERC
• Paycheck Protection Program loan and loan forgiveness documentation
• Payroll records
• Bank statements
• Employment tax records
• General ledgers, trial balances, and other accounting records
• Prior years’ tax records

Generally, you will have 10 business days to submit this information.

Reach Out To A Professional For Help

If you don’t feel comfortable navigating an IRS audit on your own, you can always reach out to a professional. This may include your CPA or your tax preparer, or even an ERC service provider like Omega Accounting Solutions or Innovation Refunds. These experts can help you gather what you need and respond to the IRS in a timely manner. Many of the best ERC companies offer built-in audit protection with their ERC services.

One final thing to note is that if you hired a third-party company to claim your ERC, now is a great time to reach out to them. Many reputable companies offer audit protection and will work with the IRS throughout the audit on your behalf, or at the very least, will offer guidance throughout the process.

IRS Audits For ERC Scams

The IRS has issued multiple warnings about ERC scams and fraud. Unfortunately, small business owners are falling victim to these scams through third-party ERC services.

While there are plenty of reputable ERC companies that can help you claim your tax credit, there are also “ERC mills” that are filing fraudulent claims. These companies accept payment for ERC services and file amended tax returns for businesses that don’t qualify for the ERC. In other cases, these companies are claiming a higher credit than the business is owed.

Unfortunately, businesses caught in these scams are ultimately held liable by the IRS. As a result, the business is responsible for repaying the credit, as well as penalties and interest added by the IRS.

Many small business owners aren’t even aware that they were scammed until an IRS audit occurs. This is why it’s so important to know how to spot an ERC scam and to do your research to find a reputable ERC company to file your claim.

The Bottom Line On ERC Audits

If you claimed the ERC, there’s a possibility that your tax return may be audited by the IRS. If you calculated correctly and held onto your documentation, getting through an audit will be a breeze. However, don’t hesitate to reach out to an accountant, tax professional, or another expert if you have any questions or concerns after being audited by the IRS.

Don’t let the chance of an audit prevent you from claiming the ERC. If you’re eligible, you can retroactively file to receive your tax credits. Check out our other ERC resources to learn more. From determining if you qualify for ERC to calculating your ERC, we’ve got you covered from start to finish. Good luck!

Employee Retention Credit Audit FAQs