Frost Law
Executive Summary:
The Employee Retention Credit (ERC) program is designed to award eligible employers who retained employees during the pandemic with high-value refundable tax credits—up to $26,000 per employee. Employers should know that the IRS is still permitting employers to claim this relief by filing amended employment tax returns. But employers should also understand that working with a knowledgeable advisor, who is able to calculate, document and defend every element needed to substantiate the credit, is absolutely essential in order to minimize audit exposure and risk.
Claiming the Employee Retention Credit (ERC) is not just running the numbers; rather, it involves an analysis of complex IRS guidance and careful application to an employer’s particular set of facts and circumstances. This analysis necessarily requires compilation and review of various records, and the IRS has clarified that an eligible employer needs to maintain such records to ensure that the employer is able to adequately substantiate their ERC eligibility.
As the number of ERC examinations continues to increase, employers should be especially discerning when choosing the tax professional to guide them through the process of claiming ERC. And even for those employers who have already claimed ERC—we urge them not to wait for a possible IRS examination notice. Now is the time to ensure that a qualified professional has reviewed the adequacy of the records used to substantiate an ERC claim.
Again, ERC claim audits have already begun—and it is widely believed that they will increase in number considering that: (1) the IRS has recently received additional funding which will be used in part to train hundreds of employment tax examiners, and (2) there is a unique extension of the time in play (from 3 to 5 years) allowing the IRS to assess ERC claim deficiencies in certain quarters. The latter is especially suggestive that the IRS envisions a need for additional time on its part to review a great number of these claims.
Thus far, IRS examinations are primarily targeting “eligibility” for the credit. And almost without exception, these examinations highlight the need to provide a carefully drafted eligibility memo which calculates, documents and defends every element needed to substantiate the credit. For example, if an employer’s eligibility claim rests on a partial suspension, the employer’s eligibility memo must include (1) the relevant government order(s) and (2) a precisely tailored narrative as to how the order(s) directly impacted the business. And in the context of an employer’s eligibility claim resting on gross receipts, the eligibility memo must provide the computations used for each quarter at stake. Any eligibility memo falling short of this standard will very likely result in an IRS determination that the employer was not entitled to ERC and an order for its repayment (with penalties and interest).
Those employers who have made an ERC claim should start reviewing their records now. Importantly, employers should ensure that they have an eligibility memo that addresses all relevant issues applicable in their circumstances. Based on the IRS examinations already in progress, we encourage employers to most immediately review with trusted counsel the following items:
Remember, claiming the ERC is analogous to claiming a tax deduction on an income tax return in that the taxpayer filing the information must sign off on it under penalty of perjury. In the IRS’s recent warning, it emphasizes:
Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. 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.1
An employer entrusts a preparer to act as a competent professional and expects to be able to rely on their analysis of the ERC claim. Trained and trusted preparers who sign off on these returns are cognizant of the high standard of conduct they are held to and the penalties for a violation of those standards. Perhaps one of the biggest red flags for an employer in the ERC context should be the preparer who won’t sign the IRS Form 941-X used to claim the credit. If the tax professional you are working with, or considering working with, is not willing or able to confirm and defend every aspect of the analysis in an ERC claim, you should find one who is.
Make sure you're prepared for an audit on your ERC forms, contact our team today at (410) 497-5947 or schedule a confidential consultation.
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Executive Summary:
The Employee Retention Credit (ERC) program is designed to award eligible employers who retained employees during the pandemic with high-value refundable tax credits—up to $26,000 per employee. Employers should know that the IRS is still permitting employers to claim this relief by filing amended employment tax returns. But employers should also understand that working with a knowledgeable advisor, who is able to calculate, document and defend every element needed to substantiate the credit, is absolutely essential in order to minimize audit exposure and risk.
Claiming the Employee Retention Credit (ERC) is not just running the numbers; rather, it involves an analysis of complex IRS guidance and careful application to an employer’s particular set of facts and circumstances. This analysis necessarily requires compilation and review of various records, and the IRS has clarified that an eligible employer needs to maintain such records to ensure that the employer is able to adequately substantiate their ERC eligibility.
As the number of ERC examinations continues to increase, employers should be especially discerning when choosing the tax professional to guide them through the process of claiming ERC. And even for those employers who have already claimed ERC—we urge them not to wait for a possible IRS examination notice. Now is the time to ensure that a qualified professional has reviewed the adequacy of the records used to substantiate an ERC claim.
Again, ERC claim audits have already begun—and it is widely believed that they will increase in number considering that: (1) the IRS has recently received additional funding which will be used in part to train hundreds of employment tax examiners, and (2) there is a unique extension of the time in play (from 3 to 5 years) allowing the IRS to assess ERC claim deficiencies in certain quarters. The latter is especially suggestive that the IRS envisions a need for additional time on its part to review a great number of these claims.
Thus far, IRS examinations are primarily targeting “eligibility” for the credit. And almost without exception, these examinations highlight the need to provide a carefully drafted eligibility memo which calculates, documents and defends every element needed to substantiate the credit. For example, if an employer’s eligibility claim rests on a partial suspension, the employer’s eligibility memo must include (1) the relevant government order(s) and (2) a precisely tailored narrative as to how the order(s) directly impacted the business. And in the context of an employer’s eligibility claim resting on gross receipts, the eligibility memo must provide the computations used for each quarter at stake. Any eligibility memo falling short of this standard will very likely result in an IRS determination that the employer was not entitled to ERC and an order for its repayment (with penalties and interest).
Those employers who have made an ERC claim should start reviewing their records now. Importantly, employers should ensure that they have an eligibility memo that addresses all relevant issues applicable in their circumstances. Based on the IRS examinations already in progress, we encourage employers to most immediately review with trusted counsel the following items:
Remember, claiming the ERC is analogous to claiming a tax deduction on an income tax return in that the taxpayer filing the information must sign off on it under penalty of perjury. In the IRS’s recent warning, it emphasizes:
Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. 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.1
An employer entrusts a preparer to act as a competent professional and expects to be able to rely on their analysis of the ERC claim. Trained and trusted preparers who sign off on these returns are cognizant of the high standard of conduct they are held to and the penalties for a violation of those standards. Perhaps one of the biggest red flags for an employer in the ERC context should be the preparer who won’t sign the IRS Form 941-X used to claim the credit. If the tax professional you are working with, or considering working with, is not willing or able to confirm and defend every aspect of the analysis in an ERC claim, you should find one who is.
Make sure you're prepared for an audit on your ERC forms, contact our team today at (410) 497-5947 or schedule a confidential consultation.
