Employee Retention Credit Claims Get a Closer Look from the IRS

The Employee Retention Credit (ERC) has been utilized by many companies as an incentive to keep employees on their payroll even as the company faced shutdowns as a result of COVID-19. As one of the many relief options contained in the CARES Act, the ERC is a fully refundable credit available to all employers who experienced a significant decline in gross receipts due to COVID-19, including tax-exempt organizations. Since its inception, guidance has been issued ad nauseam with changes, enhanced eligibility, filing requirements, etc.

The backlog at the IRS created substantial delays on refunding these claims, with some business owners being told it could take up to 16 months to receive a refund, creating more burden. Delays aside, the ERC refunds started to slowly funnel in with minimal response or additional correspondence from the IRS.  

It would appear that the IRS has worked through the COVID backlog and has begun to review the large influx of ERC credit claims more closely. The requests we have received from the IRS on behalf of our clients have asked for supporting documentation including:

• Support for the calculation of the decline in gross receipts
• Documentation of the governmental order instating full or partial shutdown of operations due to COVID-19; and how it specifically impacted business operations
• Proof of wages paid per quarter
• Balance sheets as of February 28, 2020 and balance sheets at December 31, (2020), (2021) and at the time of filing the ERC claim, as well as cash flow statements for the business to prove the relief necessary

Our tax credit specialists have assisted numerous businesses through the entire process of filing an ERC claim, including the collection of supporting documentation required to withstand IRS scrutiny and successfully claim this credit. Businesses that have made an aggressive or questionable claim will be required to substantiate those claims in order to receive their refund or face penalties from the IRS should their claim be audited.

It remains to be seen where the funds allocated by the Inflation Reduction Act for increased IRS enforcement will be spent, but increased ERC claim audits could be one indication.