Did you receive a scary IRS notice about your Employee Retention Credit (ERC) claim? If so, you’re not alone. Many businesses across the country are now receiving IRS Information Document Requests (IDRs) as the IRS steps up its auditing efforts.
The ERC program, designed to help businesses that kept employees on payroll during the COVID-19 pandemic, offers massive refunds—sometimes totaling millions of dollars. Because of this, the IRS is actively scrutinizing claims to ensure accuracy and crack down on fraudulent filings.
If your business has filed an ERC claim or is still considering one, understanding how to respond to an IRS audit request is crucial. Let’s break it down.
Why Is the IRS Auditing ERC Claims?
The IRS is randomly auditing ERC claims but is also targeting claims that raise red flags, including:
- Large ERC refunds that seem excessive for the size of the business.
- Claims filed through questionable ERC firms that may have taken a one-size-fits-all approach.
- Business owners who failed to exclude ineligible wages, such as owner wages or related parties.
While not all ERC claims will be denied, the IRS may require additional documentation to verify eligibility.
The Growing Scrutiny on ERC Claims
With businesses claiming billions in ERC refunds, the IRS has increased its oversight. Some of the key reasons for this include:
- A rise in fraudulent claims: Some third-party firms filed ERC claims without verifying whether businesses truly qualified.
- Changing IRS rules and guidelines: The IRS has issued multiple clarifications regarding ERC eligibility, making it easy for businesses to file incorrect claims.
- Potential revenue loss for the government: The IRS is ensuring that businesses that receive ERC funds genuinely qualify for the credit.
What Does the IRS Want in an ERC Audit?
If you receive an IRS Information Document Request (IDR) for your ERC claim, here’s what they will likely ask for:
- A list of employees, owners, and related parties. Ensure that owner wages and related parties are properly excluded.
- Payroll records (logs, journals, and pay stubs).
- Previously filed tax forms, including Form 941 (original and amended) and business income tax returns.
- Proof of operational suspension (e.g., government shutdown orders for your industry).
- Gross receipts for 2019, 2020, and 2021 to verify revenue declines.
- PPP loan application and forgiveness documents, if applicable.
- Evidence of wages paid to employees who were not working (for companies with over 500 employees).
- Healthcare expense documentation (if used as part of the ERC claim).
- Aggregation documentation for businesses with common ownership (which can impact eligibility).
- Copies of Form 7200, if ERC advance payments were received.
Providing complete and accurate documentation is essential to defending your ERC claim and avoiding IRS penalties.
Common Mistakes That Trigger an IRS Audit
Understanding common mistakes that lead to IRS audits can help businesses prepare their ERC claims more effectively. These include:
- Claiming the ERC without qualifying revenue decline or business suspension.
- Failing to properly document wage payments to employees.
- Applying for both ERC and PPP benefits incorrectly.
- Misreporting business ownership structures that impact aggregation rules.
- Lack of detailed records supporting eligibility.
If your business has made any of these mistakes, it’s critical to address them before the IRS starts an audit.
How to Make Your ERC Claim Bulletproof
If you’ve already filed an ERC claim—or are still considering one—you can take steps to ensure your claim is secure and can withstand IRS scrutiny:
- Work with a tax attorney to verify your claim’s legitimacy before submitting it.
- Ensure all required documents are properly organized and ready for review.
- Review the qualifications for ERC carefully, particularly if you also received a PPP loan.
- Double-check your payroll records to avoid common errors, such as including ineligible wages.
- Understand IRS aggregation rules to determine if your business is properly classified.
Can You Still File an ERC Claim in 2024?
Yes! The ERC program remains open, but businesses must file before the mid-2024 deadline. If you haven’t yet filed, now is the time to act before the opportunity closes.
What to Do If You’re Unsure About Your ERC Claim
If you’re worried that your ERC claim isn’t legitimate or could face challenges in an IRS audit, don’t wait for a notice to arrive. Instead, hire a tax attorney to conduct an independent review and provide an ERC opinion letter confirming your claim’s validity.
Why Hiring a Tax Attorney Matters
A tax attorney brings expertise in IRS regulations, compliance, and legal strategy, ensuring that your ERC claim is backed by solid documentation and professional analysis. Unlike ERC firms that simply process claims quickly, an attorney will:
- Conduct an in-depth legal review of your ERC claim.
- Ensure proper documentation is in place.
- Help you respond to IRS audits and IDRs.
- Defend your business in case of a dispute.
The Consequences of an Invalid ERC Claim
Filing an invalid ERC claim can result in severe penalties, including:
- Repayment of the ERC refund with interest.
- Additional IRS penalties for incorrect filings.
- Potential legal consequences if fraud is suspected.
Avoid these risks by ensuring your claim is legitimate and well-documented before filing.
Need Help with Your ERC Audit or Filing?
If you received an IRS audit notice or want to verify your ERC claim, contact IRS Medic today for expert legal guidance.
✅ Email us at Info@irsmedic.com
✅ Call IRS Medic at +18182934857
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At IRS Medic – Parent & Parent LLP, we specialize in helping navigate IRS audits and compliance issues. Let us help you protect your ERC claim and secure your refund!