What Is the ERC and Who Did It Support?
The ERC, also referred to as the Employee Retention Tax Credit (ERTC), was a refundable tax credit established to help businesses retain their employees during the height of the pandemic. Eligible businesses that experienced either a full or partial suspension of operations or a significant decline in revenue could claim credits based on qualified wages.
The Employee Retention Tax Credit was intended for businesses that:
Experienced a 50% decline in gross receipts in 2020 or a 20% decline in 2021.
Were subject to government-mandated shutdowns or significant operational disruptions.
Paid wages to employees, even if they were not working, to maintain staffing levels.
Common ERC Filing Mistakes
Many businesses, often relying on third-party service providers, may have made critical mistakes when filing their ERC claims, including:
- Inaccurate eligibility claims: Some businesses that were deemed essential continued operating and did not meet the criteria for suspension, yet still filed for the ERC.
- Improper wage calculations: Wages paid to family members or wages already used for PPP loan forgiveness should not have been included in ERC claims.
- Claiming ineligible quarters: Businesses must prove a significant revenue drop or a government-mandated suspension for each quarter they claimed. Without clear evidence, those claims may be flagged by the IRS.
These mistakes can result in your business being flagged for an audit, triggering penalties, interest payments, and further scrutiny of your tax filings.
Consequences of ERC Filing Errors
An ERC audit is not just about repaying improperly claimed credits. Once the IRS opens an investigation, it can lead to additional audits and even criminal investigations, including:
- EDD audits: Examining employment tax records, potentially revealing discrepancies in wages or tax withholdings.
- CDTFA audits: Investigating sales and use tax compliance in California.
- Payroll tax fraud: If payroll discrepancies or misrepresentations are found, businesses could face severe penalties and even criminal charges.
Why Hire a Qualified Tax Attorney for ERC Audits?
If your business is facing an ERC audit, hiring an experienced tax attorney is essential. The IRS does not take errors in ERC filings lightly, and providing incorrect or incomplete information can lead to far-reaching consequences. A tax attorney ensures:
- Proper documentation is presented to the IRS to avoid triggering further investigations.
- Strategic responses are made to protect your business from additional audits (EDD, CDTFA, IRS).
- Legal defense in case the audit escalates into more severe consequences like allegations of payroll tax fraud.
ERC audits are complex, and any mistakes could open the door to a broader investigation of your business finances. By engaging a tax attorney who specializes in IRS audits, you ensure that your rights are protected and that you are taking every step necessary to resolve the audit efficiently and effectively.
Contact Us Today
If your business has been flagged for an ERC audit or you’re concerned about the accuracy of your ERC filing, contact Milikowsky Tax Law. We specialize in helping businesses navigate IRS audits and defending against penalties and investigations. Don’t wait until it’s too late—protect your business now.