Thinking About Taking the Employee Retention Credit? Be Ready to Defend Your Positions

The Employee Retention Credit (ERC) is a refundable tax credit against certain employment taxes, originally created through the CARES Act in 2020 to encourage businesses to retain employees through the pandemic.

Many businesses have seen their ERC claims take six months or more to be approved, as the IRS is applying special procedures before issuing refunds in an effort to reduce fraud. In addition, the IRS has issued notices (IR-2022-183 and IR-2023-40) advising business owners to beware of third-party ERC advisors who push aggressive positions related to taxpayer eligibility and credit calculations.

But getting the ERC refund check doesn’t necessarily mean you’re in the clear. Tax professionals expect ERC claims to be a significant target for IRS audits over the next few years. The IRS has announced it is training 300 agents for civil and criminal investigations regarding ERC claims. Federal grand juries have already returned at least 10 criminal indictments related to improper ERC claims.

Criminal investigations generally only occur in particularly egregious cases, but even a civil investigation requires an enormous amount of time, money, and other resources. If you’re considering claiming the ERC, or already have, it’s important to get all your documentation together now. Create a file containing all the support used in the analysis, and carefully document all conclusions reached.

This is good advice for just about all tax situations, ERC or otherwise. It’s always better to have your positions supported by contemporaneous documentation. For one thing, it’s easier to compile this information while it is handy, and easier to explain your calculations and conclusions while they are still fresh on your mind. Tax authorities require contemporaneous documentation in some instances. Even in instances where contemporaneous documentation isn’t required, it will usually be given more weight than support gathered only after an investigation or inquiry has begun.

Schreiber Accounting and Advisory can help you understand whether your business qualifies for the Employee Retention Credit and help you file the appropriate payroll tax returns to claim it. The firm’s ERC consulting engagements always include a detailed report of all the firm’s calculations and conclusions. That documentation could prove invaluable in the event of an IRS audit. Contact the firm for more information.

Material discussed is for informational purposes only. It is not to be interpreted as investment, tax, or legal advice. Individual situations vary, and this information should only be relied upon when coordinated with individual professional advice. Not all taxpayers will receive a refund.