What triggers a ERC audit?
Contents
- 1 What Triggers an ERC Audit? Insights from Spodek Law Group
- 2 Dramatic Changes in Payroll
- 3 Unusually High ERC Claims
- 4 Multiple Amended Returns
- 5 Claiming Both PPP and ERC
- 6 Math Errors and Typos
- 7 Prior Audit History
- 8 Inconsistent Employee Count
- 9 Using Multiple Related Companies
- 10 Industry-Specific Concerns
- 11 Lack of Documentation
- 12 The Bottom Line on ERC Audits
What Triggers an ERC Audit? Insights from Spodek Law Group
You may have heard the good news about the Employee Retention Credit (ERC) – it provided a lifeline to many businesses struggling during the pandemic. But now, the bad news is that claiming the ERC has put a target on some companies’ backs for an IRS audit.At Spodek Law Group, we’ve been defending clients in high-stakes federal cases for decades. And let me tell you, when it comes to an ERC audit – you don’t want to go it alone! Our experienced attorneys can help you navigate the complex audit process and protect your business.So what exactly triggers an ERC audit? While claiming the credit doesn’t automatically mean you’ll be audited, there are some red flags that can grab the IRS’s attention. Let’s dive in and take a closer look.
Dramatic Changes in Payroll
One of the first things that can raise eyebrows at the IRS is if your payroll numbers changed significantly from one year to the next. For example:
| Year | Payroll Amount |
|---|---|
| 2020 | $500,000 |
| 2021 | $2,000,000 |
A huge jump like that could indicate you improperly claimed the ERC for wages that weren’t really paid. The IRS computers are trained to spot these kinds of inconsistencies.
Unusually High ERC Claims
Another trigger is claiming a very large ERC refund compared to similar businesses in your industry. Just like with individual tax returns, big dollar claims get more scrutiny.Let’s say you own a small restaurant, but you claimed a $500,000 ERC. That’s going to stand out! The IRS will want to verify those large payroll numbers are legit.
Multiple Amended Returns
Filing amended returns can also pique the interest of IRS auditors. Imagine this scenario:
- You claim a small ERC on your initial quarterly return
- A few months later, you file an amended return doubling the credit amount
- Then you file yet another amended return increasing it even more
That kind of pattern looks suspicious, like you’re trying to sneakily inflate your ERC claims. Our advice? Stick to one accurate return the first time!
Claiming Both PPP and ERC
Technically, you’re allowed to claim both PPP loans and the ERC. But trying to use the same wages for both programs is just asking for trouble. If you go this route, expect the IRS to put you under a microscope to make sure you didn’t double-dip.The key is meticulous recordkeeping. You need to be able to show that your PPP and ERC claims are based on different wage amounts. If your records are a mess, you’re waving a big red flag at the IRS.
Math Errors and Typos
This one seems like a no-brainer, but you’d be surprised how many ERC audits are triggered by simple math mistakes or typos. All it takes is one misplaced decimal point to make your credit calculations look fishy.Don’t rush through your ERC paperwork! Double and triple check everything for accuracy before you file. Sloppy errors are an easy way to get on the IRS’s bad side.
Prior Audit History
Unfortunately, getting audited once makes it more likely you’ll be audited again. The IRS tends to keep a closer eye on businesses that have had issues in the past.It may not seem fair, but it’s the reality. If you’ve been through an audit before, you need to be extra careful with your ERC claims. Assume the IRS will be looking over your shoulder.
Inconsistent Employee Count
Another potential audit trigger is if your employee headcount on your ERC forms doesn’t match up with past tax filings. For instance, let’s say you’re claiming the ERC for 50 workers this quarter. But on last year’s return, you only reported 10 employees.That’s a huge red flag! The IRS will want to know where all those extra people came from. You better have a good explanation backed up by solid records.
Here’s a shady move that some businesses try to pull: having different related companies claim the ERC for the same group of employees. That’s a big no-no!The IRS is always on the lookout for this kind of funny business. If you’re tempted to spread your ERC claims across multiple entities, don’t do it. It’s a one-way ticket to an audit.
Industry-Specific Concerns
Certain industries tend to get more scrutiny when it comes to ERC claims. Construction companies and staffing agencies, for example, are often targeted due to a higher rate of past fraud.If you’re in one of these “high-risk” fields, you need to be especially diligent about dotting your i’s and crossing your t’s. Assume the IRS will be looking at your claims with a skeptical eye.
Lack of Documentation
At the end of the day, the most important thing is to have detailed, organized records backing up your ERC claims. If you can’t provide solid documentation of your employee wages and hours, you’re practically begging for an audit.The IRS knows that most legitimate businesses keep meticulous books. If your records are sloppy or incomplete, they’re going to assume something fishy is going on. Don’t give them a reason to doubt you!
The Bottom Line on ERC Audits
Look, we get it – the ERC was a huge help for a lot of businesses during a really tough time. And you have every right to claim the credit if you qualify! But with the IRS cracking down on fraud, you can’t afford to be careless.At Spodek Law Group, we’ve been around the block when it comes to federal cases. There’s no audit scenario we haven’t seen! Our team of experienced attorneys knows all the tricks the IRS tries to pull.If you’re worried your ERC claims might have put you in danger, don’t panic. The first step is to get a thorough, honest assessment from a qualified professional. That’s where we come in.We’ll scour your records with a fine-tooth comb and help you get your ducks in a row. If you do get audited, we’ll be right there by your side to handle the whole process. With us on your team, you can rest easy knowing you have the best possible defense.