With the Employee Retention Tax Credit, commonly known as ERC or ERTC, the US government provided a tax relief opportunity to businesses that retained their employees through government-ordered lockdowns and other mandates in response to the COVID-19 pandemic.
However, misinformation about who exactly is eligible to claim ERC tax credit has proliferated, mainly in the form of fraudulent third-party consultants who have made aggressive and untruthful claims about the eligibility of small businesses and misled people into claiming this credit.
If you’ve been taken advantage of by one of these fraudulent ERC providers into claiming tax credits you weren’t eligible for, there could be severe consequences for you and your business. Getting a second opinion on your ERC credit from a real tax professional will ensure you don’t get caught off-guard by the possibility of an ERC audit. If you do end up audited over ERC credit, we can help.
What are the consequences of an ERC audit?
There are warning signs from the IRS that ERC audits may be coming en mass. In October, the IRS issued a press release warning taxpayers against the harms of third-party promoters who encouraged them to claim ERC credits. For some eligible ERC quarters, the usual three-year audit statute of limitations has been extended to five years. The extended statute period suggests that the IRS plans to review and audit a large number of ERC claims and will need extra time to complete its work.
Having your ERC claim audited by the IRS does not automatically mean you have claimed credits you were not eligible to claim. It only means that the IRS is casting a very wide net.
Having your ERC claim audited by the IRS does not automatically mean you have claimed credits you were not eligible to claim. Still, you will need thorough and detailed documentation to defend your ERC claim. So long as your business was indeed eligible and you have the documentation to back it up, you can successfully defend your claim and keep the tax credit.
However, should the IRS find you have claimed ERC credits you were not eligible for, they may claw back the funds you claimed, plus penalties and interest, which can put you and your business’s financial health in jeopardy.
Why is the IRS auditing ERC recipients and ERC providers?
After the ERC became widely available, many fraudulent consultants were falsely claiming to be “ERC experts” and misled businesses into claiming credits they were not eligible to claim.
The ERC intended to provide tax credits for businesses in specific industries that meet particular criteria and can directly trace financial hardship to pandemic response measures mandated by the federal government.
However, unscrupulous ERC providers have made false claims that every business qualifies for the credit, or that entire industries qualify when in reality, they do not. These providers do not analyze the client’s factual situations and do not provide sufficient analysis on whether a client qualifies for the credit. These bad actors purposely endeavor to claim as much credit for their clients as possible to pocket more money for themselves.
How to know if you’re at risk for an ERC audit
The risk of an ERC audit is high, especially for businesses that were targeted by bad actors and were most at risk of being led into making fraudulent ERC claims. Some businesses include auto dealerships, supply chain providers, and businesses in any industry that experienced pandemic-related customer shutdowns or reductions in demand, such as restaurants and hospitality.
Unscrupulous ERC providers heavily targeted these verticals. Here are some of the hallmarks of a consultant offering fraudulent ERC credit services:
- Making aggressive, too-good-to-be-true claims about your eligibility and the size of the tax credit you could receive.
- Taking a large contingency fee based on a percentage of the credit they estimate you are eligible to claim.
- Assuring you of your eligibility before thoroughly reviewing your business’ finances.
- Claiming to be a specialty tax consulting company with special training from the IRS in matters relating to ERC.
- Not providing clear and detailed information about the ERC qualification criteria.
- Making blanket statements about entire industries or verticals being eligible or claiming that nearly every business qualifies for ERC credit.
If any of these behaviors or claims ring a bell, then you may be especially at risk of being audited by the IRS over your ERC credit and having the funds you claimed taken back.
Tips for preparing for an IRS audit of your ERC claims
To prepare for an ERC audit, gather and review all of the documentation you have regarding the claim you made and your business’ finances over the past few years. You want to have thorough documentation on hand—the more detailed, the better—because that is the evidence you need to prove the validity of your claim.
Gathering all that documentation and having it in an easily digestible form for the IRS improves your likelihood of the audit having a relatively swift resolution in your favor. If you have any doubts, preparing your documentation can also help you determine whether or not your claim to ERC funds was valid.
If you were misled into claiming ERC credit you were not eligible for, thorough preparation for an ERC audit can help you lessen the severity of the consequences.
Tax documents and tax law are notoriously difficult to navigate. When it comes to preparing for an ERC audit, the burden of doing everything that needs to be done alone can feel impossible to shoulder. This is where professional tax help comes into play.
How Wiggam Law can help with your ERC claim
If you have claimed ERC credit in the past and worry you may have been misled into doing so, you should seek an ERC risk assessment. An ERC risk assessment involves a tax professional thoroughly reviewing your business’ finances and tax documents to determine the likelihood that the IRS could audit you and potentially take back the credit you claimed.
Assessing your risk for an ERC audit
If you believe you have been taken advantage of by a fraudulent ERC provider, we can review the work of the other provider and determine if their analysis was sufficient for ERC qualification and whether the IRS will agree. If not, we can work to bolster your qualification for the credit as much as possible and prepare you for a potential IRS audit.
Preparing for and resolving an ERC audit
Being audited over ERC tax credits can have serious negative consequences for your finances and the health of your business if you are caught unprepared or are found to have claimed ERC credit you weren’t eligible to claim.
It’s best to start preparing now for an audit so that you can be ready no matter what the outcome is. Our team of tax professionals can come to your aid and assist you in reviewing and collecting your documentation, determining your ERC audit risk, and negotiating with the IRS.
The prospect of being audited is scary no matter how much or how little risk you have—especially when you’re the one shouldering the blame. If you’ve been taken advantage of by fraudulent ERC “experts” who lined their pockets at your expense, know that you’re not alone—you’re one of many small business owners across the country, and the professionals at Wiggam Law are here to help.
You should never face an IRS audit alone; with Wiggam Law, you won’t have to. We are here to help you every step of the way. We’ll zealously represent you through every step of the audit and in any other potential government actions, such as litigation or subpoena requests, to ensure you don’t suffer at the hands of the bad actors who claim to be ERC experts.